A customer is currently suing a company. A reasonable estimate can be made of the costs that would result from a ruling unfavorable to the company, and the amount involved is material. The company's managers, lawyers, and auditors agree that there is only a remote likelihood of an unfavorable ruling. This contingency:

Should be disclosed in a footnote.

Should be disclosed as a parenthetical comment in the balance sheet.

Need not to be disclosed.

Should be disclosed by an appropriation of retained earnings.