Current Liabilities

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 your last HW assignment, 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, there's plenty of time before the end of the year to correct the issue). You've also received notice of two lawsuits. Details are included below.

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.

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

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

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.

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.

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.

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.)

On 2/28/2017, you receive word through Luca that Mr.Speakers is being sued for $1,000,000 because a customer's 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.

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.

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.

Record all salary entries for February (2/3, 2/10, 2/17, 2/24, and 2/28). Don't worry about chronological order. Just add these en