HWI4: Revenue Recognition

Company accounting policies:

Mr.Speakers rounds all transactions to the nearest dollar.

All depreciation and intangible asset amortization is taken as one full year in the initial year of service.

FIFO inventory method.

In the last HW assignment, Mr.Speakers had finished out 2016 and produced its first set of annual financial statements. During 2017, your ownership/management team has goals of expanding the product line to include two headphones and numerous accessories and to increase sales and operating cash flow. To accomplish this goal, you have invited Corrines rich uncle to become a silent partner in the business (he will have no input into the operations of the company, no voting stock, and NO SALARY). The plan is to use the cash infusion to begin producing Avelias newly designed 2^nd headphone and accessories.

1. Before engaging in new transactions, record any necessary journal entries for 1/1/2017 based on your prior homework (hint one bond, one capital lease, and two operating leases).

2. On 1/2/ 2017 Corrines uncle buys 190 shares of Preferred Stock for $2,000 per share.

3. The owners have voted to increase their salaries to $500 per week per person (again, excluding Corrines uncle). Record the 1/6/2017 salary transaction.

4. On 1/6/2017 Mr.Speakers announces and begins producing its new product lines. The product lines consist of two headphones the original MRSP1 and the new and improved MRSP2. The MRSP2 will have a retail price of $750. The price of the MRSP1 is lowered to $400. Avelia has also designed soft ($20) and hard ($35) travel cases that fit either headphone, an upgraded, 100% oxygen-free silver headphone cable ($105), and an ergonomic, gel and memory foam headband attachment ($50) to increase the comfort of Mr.Speakers headphones.

Headphones Accessories

Name Retail Cost Name Retail Cost

MRSP1 $400 $200 Soft Case $20 $10

MRSP2 $750 $350 Hard Case $35 $20

Comfort Band $50 $20

Cable Upgrade $105 $35

During January, Mr.Speakers produces 100 MRSP1, 50 MRSP2, 50 soft cases, 25 hard cases, 100 comfort bands, and 20 upgraded cables. Date the summary entry 1/31/2017.

5. On January 17, Mr.Speakers sold the 20 headphones that were in inventory at the beginning of the year for $400 each (cash).

6. Record the salary journal entries for January 13, 20, 27, and 31, 2017.

7. To celebrate the launch of their new headphone, Mr.Speakers offers a special pre-order package deal on January 13 one MRSP2, a hard case, comfort band, and a coupon for 20% off a cable upgrade for $800. All sales are final, and Mr.Speakers expects half of the customers to purchase the cable upgrade. Mr.Speakers sells 10 of these launch packages. The entire package will be shipped on January 20^th.

8. On January 21^st, 2 of the cable upgrade coupons were redeemed.

9. Record the 1/31/2017 entry for bonds.

10. During the month of January, Mr.Speakers also sold 80 MRSP1s, 45 MRSP2s, 20 soft cases, 10 hard cases, 75 comfort bands, and 10 cable upgrades, all for list price. Due to high demand, 5 of the MRSP2s were backordered and will not be shipped before 2/1/2017. All other items were shipped during January. Record one journal entry dated 1/31/2017 to record the sales.

11. On January 10, 2017, Mr.Speakers entered into a contract to provide 20, custom-made headphones for a large recording studio. The custom headphones have a comfort band and upgraded cable built into the headphone, though the headphone drivers (the speaker) will be custom built for the client (though they could potentially be sold to other customers). MrSpeakers does not have a price for the custom headphones as a standalone unit without the cable and comfort band upgrade. Other headphone makers sell similar headphones as standalone units for $1,510. The cost to produce the custom headphones without the comfort band and upgraded cable is $800. MrSpeakers will also provide 20 hard cases as part of the package. All items in the contract will be built for the order, and added to inventory before the sale. The total contract price is $32,000. Mr.Speakers will be paid $10,000 on January 10, $2,000 on delivery of the hard cases, and $20,000 on delivery of the headphones. If all units work and all deliveries are made by February 14^th, Mr.Speakers will be paid bonus compensation of $2,000 payable on February 28th. Mr.Speakers has never had an order returned for a manufacturing defect, and is 75% certain that it can make the February 14^th deadline. Separate bonus and sales revenue.

12.

a. Record the January 10^th journal entry.

b. Record the journal entry to produce the inventory needed to fulfill the order. Date the entry 1/20/2017.

c. Mr.Speakers delivers the hard cases on February 2^nd.

d. Mr.Speakers delivers the custom headphones on February 13^th, and all units work.