Answer
Financial Accounting Standards Board's (FASB) statement No.5 requires that a loss should only be accrued when (1) there is a likelihood that the company will lose the suit and (2) when the amount of loss can be correctly valued/estimated. Here, it is unlikely that the organization will lose the lawsuit.
Work Step by Step
The matching principle calls for expenses to be recognized within respective periods. However, it is unlikely that the organization will bear liability for a product that they didn’t manufacture; thus, this entry should have never been recognized.
