Scooter General Inc. is in its first year of manufacturing and selling high-end scooters. The company warrants its products for one year and estimates product warranty costs at 2% of sales. During January, a customer sued the company for false advertising. The company’s legal counsel has been in negotiations with the customer’s attorney and believes that it is probable the company will reach an out-of-court settlement for $85,000 in the coming weeks. The lawsuit will not impact the company’s warranty cost estimate.

a. Should the company journalize the contingent liability associated with the lawsuit?

b. Journalize the adjusting entry required at the end of January to record the estimated product warranty costs. Sales were $800,000 during January.

c. In February, the company made warranty repairs requiring $900 of replacement parts and $400 of labor costs. Journalize the entry to record the warranty work provided in February.