Peterson Security Systems revenues for 2010 totaled $26.2 million. As with most companies, Peterson is a defendant

Question:

Peterson Security Systems revenues for 2010 totaled $26.2 million. As with most companies, Peterson is a defendant in lawsuits related to its products. Note 14 of the Peterson Annual Report for 2010 reported the following:

Requirements
1. Suppose Peterson’s lawyers believe that a significant legal judgment against the company is reasonably possible. How should Peterson report this situation in its financial statements?
2. Suppose Petersons lawyers believe it is probable that a $2.5 million judgment will be rendered against the company. Report this situation in Peterson’s financial statements.
Journalize any entry required by GAAP. Explanations are not required.