Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales are $900,000. Actual warranty expenses incurred so far are $10,000. 1. Does this situation represent a contingent liability?

• Yes

• No

2. & 3. Record the appropriate journal entries for the warranties. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Record warranty expense and warranty liability for the year based on 5% of sales.

Record the actual warranty expenditures of $10,000 incurred so far.

4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?