Paul Smith Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Paul Smith will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet?

A) Record; decrease stockholders' equity and increase liabilities. B) Record; increase stockholders' equity and decrease liabilities. C) Disclose; no effect in the balance sheet. D) Disclose; decrease stockholders' equity and decrease liabilities.