One of Scarlets workers notified management on January 10, 2017 that he planned to sue the company for $1 million related to a work-site injury happening on December 20, 2016. Legal counsel advised that it is probable that Scarlet could lose $200,000 for this lawsuit, but that its extremely unlikely that it could lose $1 million asked for. The outcome of the lawsuit was not known yet on March 15, 2017 when Scarlet issued the 2016 financial reports.

Which of the following statements is appropriate for Scarlet Industries:

1. A loss of $200,000 should be accrued for year 2016.

2. A loss of $1 million should be accrued for year 2016.

3. A loss of $200,000 should be accrued for year 2017 but not for 2016. A disclosure note

   should be provided in the 2016 financial statements.

4. No loss should be accrued for either 2016 or 2017. Only a disclosure note should be

   provided in the 2016 financial statements.