Crockett Security Systems' revenues for 2016 totaled $21.9 million. As with most companies, Crockett is a defendant in lawsuits related to its products. Note 14 of the Crockett annual report for 2016 reported the following:
14. Contingencies
The company is involved in various legal proceedings.... It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.
Requirements
1. Suppose Crockett's lawyers believe that a significant legal judgment against the company is reasonably possible. How should Crockett report this situation in its financial statements?
2. Suppose Crockett's lawyers believe it is probable that a $ 1.7 million judgment will be rendered against the company. Report this situation in Crockett's financial statements. Journalize any entry required by GAAR Explanations are not required.