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Tefria Technologies Limited (TTL) is a small, start-up technology company in Ottawa that manufactures portable keyboards for mobile devices and tablets. TTL has been working to perfect a technology that is used in a laser-projection virtual keyboard. TTL has been investing heavily in research and development, and is constantly having working capital issues. In order to ease the pressure, TTL 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 TTL, and you are preparing for the December 31, 2020, 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 help create memos that analyzes the following key accounting issue:

TTL sold 50,000 laser-projection, virtual keyboards to Mega Mart. Mega Mart paid TTL in cash up front. The keyboards were sold for $30 each, and include a one-year warranty. The warranty is to be serviced by TTL, and not Mega Mart. Considering that the product is relying on relatively new technology, TTL estimates that approximately 5% of all keyboards will require some work. Management has estimated that the average cost per warranty claim will be $15. No claims have been made during the current fiscal year.

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