Distinguishing the Accounting for Contingent Liabilities

The following legal claims exist for Kumamon Co. Identify the accounting treatment for each claims as either (a) a liability that is recorded or (b) an item described in notes to its financial statements.

1. Kumamon (defendant) estimates that a pending lawsuit could result in damages of 2,500,000; it is possible that plaintiff will win the case.

2. Kumamon faces a probable loss on a pending lawsuit; the amount is not reliably estimate.

3. Kumamon estimates damages in a case at 4,000,000 with a high probability of losing the case.