On December 1, 2020, BrainForce, a maker of energy drinks and supplements, receives a notice that the company is being sued because its drinks allegedly contribute to heart attacks. Interestingly, the previous week, BrainForces main competitor (with similar sales) just lost a similar case and was ordered to pay plaintiffs $1 billion in damages. Hence, it is probable that BrainForce will lose the case, and the losses are estimated to be similar to those of its competitor. Given this information, how should the lawsuit affect BrainForces financial statements?

The company will provide a disclosure regarding the lawsuit in the notes and will accrue lawsuit expense of $1 billion in the last quarter of 2020.

The company will provide a disclosure regarding the lawsuit in the notes but will not accrue any liability on the balance sheet.

The company will wait until it loses the lawsuit to accrue the actual judgment against it on the balance sheet.

There is no need to report this information anywhere on the financial statements or the notes.