Following is the unadjusted trial balance for Pens Unlimited on December 31, 2017.

You are also given the following supplemental information: A pending lawsuit, claiming $4,200 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. Pens Unlimited believes a customer may win a lawsuit for $5,000 in damages, but the outcome is only reasonably possible to occur. Pens Unlimited records warranty estimates on the basis of 2% of annual sales revenue.
A. Using the unadjusted trial balance and supplemental information for Pens Unlimited, construct an income statement for the year ended December 31, 2017. Pay particular attention to expenses resulting from contingencies.
B. Construct a balance sheet, for December 31, 2017, from the given unadjusted trial balance, supplemental information, and income statement for Pens Unlimited. Pay particular attention to contingent liabilities.
C. Prepare any necessary contingent liability note disclosures for Pens Unlimited. Only give one to three sentences for each contingency note disclosure.

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Account PENS UNLIMITED Unadjusted Trial Balance Year Ended December 31, 2017 Debit $ 8,500 3,000 6,750 5,600 4,000 Cash Account Receivable Merchandise Inventory Buildings Equipment Accounts Payable Salaries Payable Common Stock Dividends Sales Revenue COGS Salaries Expense Totals 5,400 4,250 $37,500 Credit $ 7,500 4,250 5,000 20,750 $37,500