MicroFab is a company located in southern Italy. It manufactures fabrics used in car seats.

• On August 2, 2014 the company negotiated a short-term line of credit of up to $8,500,000 at an interest rate of 10%. MicroFab will not pay any commitment fees or be required to maintain a compensating balance. On August 31, 2014 the company borrowed $6,000,000 cash from the bank under the line of credit and issued a six-month note payable. Interest was payable at maturity.
• The company usually provides samples of fabrics to its customers in exchange for a refundable deposit. On September 18, 2014 MicroFab, collected refundable deposits of $35,000. The return date for the samples was set for March 18, 2015.
• On December 31 2014, the accountant recorded the necessary adjusting entry to show that $800,000 vacation time will be carried forward to 2015.
• On February 28, 2015, MicroFab paid back the bank loan which it took out six months earlier. Furthermore, all samples were returned to the company on March 18 2015 thus prompting MicroFab to refund the deposits.
• On October 15, 2014, MicroFab introduced a new product that carries a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. On December 31, 2015, the company reported sales to be $6,000,000.

Required:

1. Record all necessary journal entries in 2014 and 2015.
2. As a result of MicroFab's accumulated compensated absence policy, the company will record an adjusting entry at the end of 2014. Discuss the accounting principle that requires the company to record an expense at the end of 2014 when in reality, employees will take their vacations in 2015.
3. Mary Townsend, the company's CFO, was unclear about the accounting for a pending legal case. She requested your advice about a lawsuit the company filed against Santa Fe Company for $33 million. Based on the opinions of legal advisors, Mary believes that there is a strong probability that MicroFab will be awarded $25 million. What is your advice to Mary regarding the appropriate method for reporting this situation.

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August 2 2014 Borrowed 8500000 from the bank at 10 interest August 31 2014 Borrowed 6000000 from the bank Issued a sixmonth note payable September 18 ... View the full answer