Technotronics Electronics Limited (TEL) is a small, start-up technology company in Ottawa that manufac- tures portable keyboards for mobile devices and tablets. TEL has been working to perfect a technology that is used in a laser-projection virtual keyboard. TEL has been investing heavily in research and development, and is constantly having working capital issues. In order to ease the pressure, TEL has taken out a $500,000 working capital loan. The loan is required to be paid back within two years, and carries an interest rate of 1% per month on any outstanding balance. The loan includes a covenant that requires the current ratio to be maintained at least 1.5:1. You are the controller of TEL, and you are preparing for the December 31, 2017, year-end audit. You know that the shareholders and bank will be paying close attention to the financial statements this year due to the covenant. Accordingly, the CFO would you like to prepare a memo that analyzes the following key accounting issues: 1. TEL is currently being sued for patent infringement by a rival company. TEL's lawyers believe that the patent infringement case is unfounded; however, litigation always includes an element of uncer- tainty. Accordingly, the lawyers have developed the following payment estimates: 35% chance of no payment, 45% chance of a $100,000 payment, and 20% chance of a $250,000 payment. The case will be settled by March 31, 2018. 2. TEL entered into a forward contract with Marson First Trust to purchase US$100,000 at a rate of C$1.20 per U.S. dollar. The contract is to be settled on June 30, 2018. As of year end, the exchange rate is C$1.10 per U.S. dollar. 3. TEL sold 50,000 laser-projection, virtual keyboards to Mega Mart. Mega Mart paid TEL in cash up front. The keyboards were sold for $30 each, and include a one-year warranty. The warranty is to be serviced by TEL, and not Mega Mart. Considering that the product is relying on relatively new technology, TEL estimates that approximately 5% of all keyboards will require some work. Manage- ment has estimated that the average cost per warranty claim will be $15. No claims have been made during the current fiscal year. 4. TEL holds a $500,000 loan with the Royal Legion Bank that is due on January 31, 2018. Management intends to refinance the loan into a five-year blended payment loan. As of year end, the company had received the financing contract, but it had not yet signed the document. The board of directors is expected to formally approve the refinancing at the upcoming meeting on January 10, 2018. The loan is classified as non-current. The CFO reminds you that no journal entries have been posted for the contingency, forward contract, or warranty. The CFO would like you to discuss the proper accounting treatment for the above-noted issues, and to provide journal entries where appropriate. Draft IFRS-compliant financial statements, prior to any adjustments proposed for the above issues, reveal current assets of $2.5 million and current liabilities of $1.1 million. Determination of Working Capital and Working Capital Ratio As at Dec. 31/17 per IFRS Current Assets, as reported before the adjustments in this report $2,500,000 $1,100,000 Current Liabilities, as reported before the adjustments in this report Adjustments: 1) Patent Infringement 2) Warranties 3) Loan Refinancing Adjusted Current Liability Value A B C D E Working Capital Working Capital Ratio (Current Ratio) Consolidate the results of your analyses of the issues and enter the best recommendation for the amounts A through Frequired to complete the Big Picture Exhibit above: [Format: Enter monetary amounts rounded to the nearest dollar without currency symbol or punctuation (e.g. $123,456.78 should be entered as 123457); Format ratios as decimals rounded to 2 decimal places (e.g. 2.987 should be entered as 2.99)] Technotronics Electronics Limited (TEL) is a small, start-up technology company in Ottawa that manufac- tures portable keyboards for mobile devices and tablets. TEL has been working to perfect a technology that is used in a laser-projection virtual keyboard. TEL has been investing heavily in research and development, and is constantly having working capital issues. In order to ease the pressure, TEL has taken out a $500,000 working capital loan. The loan is required to be paid back within two years, and carries an interest rate of 1% per month on any outstanding balance. The loan includes a covenant that requires the current ratio to be maintained at least 1.5:1. You are the controller of TEL, and you are preparing for the December 31, 2017, year-end audit. You know that the shareholders and bank will be paying close attention to the financial statements this year due to the covenant. Accordingly, the CFO would you like to prepare a memo that analyzes the following key accounting issues: 1. TEL is currently being sued for patent infringement by a rival company. TEL's lawyers believe that the patent infringement case is unfounded; however, litigation always includes an element of uncer- tainty. Accordingly, the lawyers have developed the following payment estimates: 35% chance of no payment, 45% chance of a $100,000 payment, and 20% chance of a $250,000 payment. The case will be settled by March 31, 2018. 2. TEL entered into a forward contract with Marson First Trust to purchase US$100,000 at a rate of C$1.20 per U.S. dollar. The contract is to be settled on June 30, 2018. As of year end, the exchange rate is C$1.10 per U.S. dollar. 3. TEL sold 50,000 laser-projection, virtual keyboards to Mega Mart. Mega Mart paid TEL in cash up front. The keyboards were sold for $30 each, and include a one-year warranty. The warranty is to be serviced by TEL, and not Mega Mart. Considering that the product is relying on relatively new technology, TEL estimates that approximately 5% of all keyboards will require some work. Manage- ment has estimated that the average cost per warranty claim will be $15. No claims have been made during the current fiscal year. 4. TEL holds a $500,000 loan with the Royal Legion Bank that is due on January 31, 2018. Management intends to refinance the loan into a five-year blended payment loan. As of year end, the company had received the financing contract, but it had not yet signed the document. The board of directors is expected to formally approve the refinancing at the upcoming meeting on January 10, 2018. The loan is classified as non-current. The CFO reminds you that no journal entries have been posted for the contingency, forward contract, or warranty. The CFO would like you to discuss the proper accounting treatment for the above-noted issues, and to provide journal entries where appropriate. Draft IFRS-compliant financial statements, prior to any adjustments proposed for the above issues, reveal current assets of $2.5 million and current liabilities of $1.1 million. Determination of Working Capital and Working Capital Ratio As at Dec. 31/17 per IFRS Current Assets, as reported before the adjustments in this report $2,500,000 $1,100,000 Current Liabilities, as reported before the adjustments in this report Adjustments: 1) Patent Infringement 2) Warranties 3) Loan Refinancing Adjusted Current Liability Value A B C D E Working Capital Working Capital Ratio (Current Ratio) Consolidate the results of your analyses of the issues and enter the best recommendation for the amounts A through Frequired to complete the Big Picture Exhibit above: [Format: Enter monetary amounts rounded to the nearest dollar without currency symbol or punctuation (e.g. $123,456.78 should be entered as 123457); Format ratios as decimals rounded to 2 decimal places (e.g. 2.987 should be entered as 2.99)]