The following independent situations represent various types of liabilities. Analyze each situation and indicate which of the following is the proper accounting treatment for the company: (a) record a liability on the balance sheet, (b) disclose the liability in a financial statement footnote, or (c) neither record nor disclose any liability.

The Environmental Protection Agency notifies Stark Industries that a state where it has a plant is fil- ing a lawsuit for groundwater pollution against Stark and another company that has a plant adjacent to Stark's plant. Test results have not identified the exact source of the pollution. Stark's manufactur- ing process often produces by-products that can pollute groundwater. Franklin Company manufactured and sold products to a retailer that later sold the products to consumers. Franklin Company will replace the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 1.2% of the products are returned for replacement