The company’s total losses/expenses as management has estimated are $11 million. The total amount that the auditor might suggest would be about $18.6 million. This means that the materiality threshold is broken for materiality of misstatement of net income, even though as shown below, each entry itself does not break that threshold by itself. The deferred costs can be divided over the next 2 years. So this year’s entry would be as follows and there should be a disclosure note about the remaining $6,000,000. There also should be a disclosure about the uncertainty of the company. Subscription expense
Deferred Subscription Costs
To recognize and record the deferred subscription costs being expensed.
The company needs to expense the projected uncollectible debts. Bad debt expense
Allowance for uncollectible accounts
To create an allowance for uncollectible debt.
For the expected warranty expense, there is not probability given of how much it will cost. So going on the low side it could only be $2 million and on the high side it could be $6 million. This range itself would be considered immaterial because it is below the $7 million threshold. Therefore, this one should be left up to management’s decision and a disclosure note should accompany the financial statements indicating that possible range of warranty expenses, etc. Warranty Expense
To record the estimated warranty liability.
To mark down the loss on the inventory that is now obsolete, one first has to figure out the Net Realizable Value, which is the lower of cost of market. Since they can sell the products for $8 million minus the selling cost of 20% of the sales revenue ($1.6 million) and the cost to rebuild the inventory of $2 million, the ceiling is then $4.4 million and the floor is $4 million ($4.4 million minus the 5% normal profit ($400,000)). The NRV therefore is the $4.4 million. And since the cost...
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