Conrad Corporation sells motorcycle helmets. In 2011, Conrad sold 4 million helmets before discovering a significant defect in their construction. By December 31, 2011, two lawsuits had been filed against Conrad. The first lawsuit, which Conrad has little chance of winning, is expected to settle out of court for $750,000 in January 2012. Conrad’s attorneys think the company has a 50–50 chance of winning the second lawsuit, which is for $400,000. What accounting treatment should Conrad give the pending lawsuits in the 2011 year-end financial statements? (Include any necessary journal entries.)