WBM Motorworks is a manufacturer of high-end touring and off-road motorcycles. On November 30, the company was sued by a customer who was injured when the front shock absorber on the WBM Series 3 motorcycle cracked during use. The company conducted a preliminary investigation into the matter during December and found evidence of a manufacturing defect in the shock absorber. While it is uncertain whether the manufacturing defect is the source of the product failure, the company has voluntarily recalled the front shock absorbers on the Series 3 motorcycles. The company is uncertain how the lawsuit will be resolved. Similar lawsuits against other manufacturers have been settled for approximately $2,000,000.

Write a brief memo to the president of WBM Motorworks, Tom Jones, discussing how the lawsuit might be reported in the financial statements.

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