10(b) In November 2016, state government authorities filed suit against Scarlet Industries, asking civil penalties and injunctive relief for violations of clean water laws. On December 31, 2016, Scarlets lawyers indicated that the likelihood of losing the lawsuit was possible but not probable. On February 3, 2017, Scarlet reached a settlement with state authorities to pay cash $4.2 million in penalties.

Which of the following statements is appropriate for Scarlet Industries:

A. Scarlet should prepare a journal entry to record a loss from litigation $4.2 million and cash payment of $4.2 million for the 2016 financial statements.

B. There is no journal entry for the 2016 financial statements; Scarlet should record a loss from litigation $4.2 million and cash payment of $4.2 million for the 2017 financial statements.

C. Scarlet should prepare a journal entry to record a loss from litigation $4.2 million and the accrued litigation liability of $4.2 million for the 2016 financial statements.

D. Scarlet should record the accrued litigation liability of $4.2 million for the 2016

financial statements and record the litigation loss and cash payment of $4.2 million for the 2017 financial statements.