HWI5: Current Liabilities

Company accounting policies:

1. Mr.Speakers rounds all transactions to the nearest dollar.

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

3. FIFO inventory method.

In your last HW assignment (provided at the bottom with answers), Mr.Speakers had begun selling new products, including a new line of headphones, and fulfilled a large custom headphone order. As of January 1, 2017, Mr.Speakers has included a five year warranty on all products it sells. However, you just now remembered that you need to record the warranty liability (no big deal, theres plenty of time before the end of the year to correct the issue). Youve also received notice of two lawsuits. Details are included below.

1. Record all bond and lease entries from 2/1/2017 through 2/28/2017. Hint: use one entry to lease or rent expense for operating leases.

2. 3 cable upgrade coupons from Mr.Speakers launch sale were redeemed on February 10^th.

3. On 2/14, Mr.Speakers received a deposit of $500 on an MRSP2. However, the MRSP2 is still backordered.

4. During February, Mr.Speakers produced 200 MRSP1 units, 150 MRSP2 units, 100 soft cases, 100 hard cases, 300 comfort headbands, and 20 upgraded cables. Prepare the journal entry, dated 2/15, for the production. All production was at standard cost. Assume half of these costs were paid in cash and half were paid on account.

5. On 2/16, Mr.Speakers shipped the backordered MRSP2 units sold during January and the unit ordered during February in #3. The remaining $250 balance was billed to the customer who made the deposit in February.

6. During February, Mr.Speakers sold 175 MRSP1 units, 100 MRSP2 units, 80 soft cases, 95 hard cases, 250 comfort headbands, and 20 upgraded cables, all at standard price plus 10% sales tax, for cash. Date the sales entries 2/28.

7. On 2/28 you estimate your warranty liability. You estimate 1% of all headphone UNITS sold during the year will need to be replaced, at standard cost, excluding the custom headphones (Hint: Round partial units up be conservative in your accounting). You are uncertain how many of your other products will be returned. Therefore you decide to make an additional warranty reserve based on 1% of TOTAL SALES, including headphone sales) since the beginning of the year, including the custom order and bonus revenue. Record two journal entries, one for the headphone warranty reserve, and one for the additional warranty reserve. (Hint: sum all sales revenue entries excluding the bonus, but do not include deferred revenue, doing so will double count those sales.)

8. On 2/28/2017, you receive word through Luca that Mr.Speakers is being sued for $1,000,000 because a customers ear was allegedly burned by an electrical short in a headphone driver. Luca believes there is an 80% chance that you will lose the case, but the damages are only likely to be $25,000. Should you do nothing, make a footnote disclosure, or record the contingent liability? If you should record it, do so.

9. You also receive word through Luca that Mr.Speakers is also being sued for patent infringement for $200,000. Luca believes the claim is meritless and you have a 99% chance of winning the case. If you lose, the damages would be all $200,000. Should you do nothing, make a footnote disclosure, or record the contingent liability? If you should record it, do so.

10. Finally, the State of Alabama and the City of Tuscaloosa are suing Mr.Speakers for failing to collect and remit sales taxes. Luca advises that there is a 30% chance that you will lose the case, and if you lose, the penalties and back taxes will be $50,000. Should you do nothing, make a footnote disclosure, or record the contingent liability? If you should record it, do so.

11. Record all salary entries for February (2/3, 2/10, 2/17, 2/24, and 2/28). Dont worry about chronological order. Just add these entries after #10.

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LAST HW Questions-> HWI4: Revenue Recognition

Company accounting policies:

1. Mr.Speakers rounds all transactions to the nearest dollar.

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

3. 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	Acessories
Name Retail Cost	Name Retail Cost
MRSSP1 $400 $200	Soft Case $20 $10
MRSSP2 $750 $350	Hard Case $35 $20
	Comfort Band $50 $20
	Cable Upgrade $150 $35

6.Record the salary journal entries for January 13, 20, 27, and 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). (this is number 5)

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.

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.

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HWI4 Answers :

Item Date Dr. Cr. Amount 1 1/1/2017 interest payable 2,500 cash 2,500 1 1/1/2017 interest payable 4,755 9,917 lease liability cash 14,672 1 1/1/2017 lease expense 335 cash 335 1 1/1/2017 lease expense 2,000 cash 2,000 2 1/2/2017 cash 380,000 preferred stock 19,000 361,000 PIC-PS 3 1/6/2017 salary expense 2,500 cash 2,500 4 1/31/2017 inventory 41,200 Cash 41,200 5 1/31/2017 cash 8,000 8,000 sales revenue COGS 4,000 4,000 inventory Item Date Dr. Cr. Amount 1 1/1/2017 interest payable 2,500 cash 2,500 1 1/1/2017 interest payable 4,755 9,917 lease liability cash 14,672 1 1/1/2017 lease expense 335 cash 335 1 1/1/2017 lease expense 2,000 cash 2,000 2 1/2/2017 cash 380,000 preferred stock 19,000 361,000 PIC-PS 3 1/6/2017 salary expense 2,500 cash 2,500 4 1/31/2017 inventory 41,200 Cash 41,200 5 1/31/2017 cash 8,000 8,000 sales revenue COGS 4,000 4,000 inventory