A customer of Smooth Steel Knife Co. alleges that Smooth Steel's new knife set had a defect that resulted in serious injury to the customer. Smooth Steel believes the customer has a 50% chance of winning the case, and that if the customer wins the case, Smooth Steel's lawyers estimate the loss would be approximately $1,500,000. Under U.S. GAAP, Smooth Steel should:

Multiple Choice

Accrue a $1,500,000 liability and classify $1,500,000 of its cash account as "restricted" in anticipation of paying the future loss

Accrue a $1,500,000 liability and include a description of the lawsuit in the disclosure notes of its financial statements

Not accrue a liability and not disclose the lawsuit in its financial statement notes

Not accrue a liability, but include a description of the lawsuit in the disclosure notes of its financial statements