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The Cherry & White Bike Company is a small closely-held company with two owners.  Its two owners, Charlotte and George, have decided to expand the business.  You are CWB’s accountant. Your responsibilities include maintaining all accounting records and preparing annual financial statements.

 

Intermediate Accounting I

Accounting Project – Version 3

Cherry & White Bike Company

The Cherry & White Bike Company is a small closely-held company with two owners.  Its two owners, Charlotte and George, have decided to expand the business.  You are CWB’s accountant. Your responsibilities include maintaining all accounting records and preparing annual financial statements.

CWB wants to take out a loan to expand its business in the coming year.  The banks and lending institutions require a set of financial statements prepared under U.S. GAAP to evaluate CWB’s credit worthiness.

You must prepare a complete set of financial statements including the notes to the financial statements for the quarter ending March 31, 2018.  You need to choose CWB’s accounting policies and methods for areas including inventory cost flow, revenue recognition, and depreciation.  You will need to consider the proper classification of assets and liabilities as current and non-current on the balance sheet.

To obtain a loan with the lowest interest rate available, CWB needs to show high profitability, and strong liquidity and solvency. You realize the common financial statement analysis ratios for profitability, solvency and liquidity will depend on the accounting methods you choose. So, you carefully analyze the accounting choices in light of common financial statement ratios.

The owners also have expressed to you that they need to know their inventory and cost of goods sold to manage purchases and pricing.  So, you are highly consideringusinga perpetual inventory system.

You are presented with a trial balance as of the end of 2017 and must add the transactions and activities that occurred in the first quarter of 2018 as listed below. You can add accounts to the trial balance, as needed. In the first quarter of 2018 Cherry & White Bikes had the following transactions

January 1: The owners hire Nina Marton to manage the store, paying her a salary of $2,800 a month. Lisa is paid on the 1st of every month, starting on February 1 (which would represent her January pay). They have one other employee who they pay $1,900 a month, also on the 1st of the following month. Employees work 40 hours a week.

January 14:   Paid utilities for 4th quarter of 2017, $775.

February 1:  Installed new light fixtures and display cases in the leased store.  CWBpaid $1,600 for the fixtures, $120 for shipping to the store, and $500 to an electrician to install. CWB paid 6% sales tax on the fixtures and shipping in addition to the cost of the fixtures and equipment.  It did not pay a sales tax to the electrician.  CWB anticipates being in the store for at least 5 years.  CWB cannot take the light fixtures with them if they relocate as they will revert to the lessor.

CWB can take the display cases if they move.  The display cases cost $3,400.  CWB also incurred 6% sales tax on the display cases on addition to their cost.

Both the display cases and light-fixtures have a seven-year useful life.

March 1:       CWB invests in a $4,0003-month treasury bill paying interest of 3.0%.

March 24:  A customer puts down a deposit of $700 on a high-end racing bike that sells for $2,900.  CWB ordered the bike from the manufacturer.  The manufacturer promises CWB will have the bike at the store on April 3.

Here is other information on other activity and recurring transactions that occurred during the period.

CWB offers bike tune-ups for $80 each. CWB’s employee is an experttune-ups, taking about one hour per bike for a tune-up.  Below is the number of tune-ups performed in each month.  All customers pay in cash.  (For recording the transactions, you can assume all tune-ups are done the last day of the month).

 

Month

Number of

Tune-Ups

January 18
February 36
March 30

CWB has the following purchases and sales of bikes during the quarter+:

Date Transaction Quantity Cost per Bike
Beginning Inventory   25 $110
January 31 Sale 15  
February 4 Purchase 20 $115
February 10 Sale 13  
February 21 Sale 15  
March 2 Purchase 28 $120
March 15 Sale 20  

+All purchasers of standard bikes are given the option of buying a bike for $400, or a bike with two years of tune-ups for $500. Four of the bikes sold on February 21st were sold with the tune-up option.

**All purchases were made using cash except the March 2nd purchase for which CWB obtained two-months credit from the bike supplier.

CWB took out a five-year loan for $15,000 with an interest rate of 12% on January 1, 2017. The loan matures on January 1, 2022.

CWB rents its premises for $1,000 per month, with rent due on the 15st of the prior month.

CWB has a business insurance policy, which it purchased for $3,300 on July 1, 2017. The policy runs until June 30, 2018

CWB owns various tools and equipment which it pools for purpose of calculating depreciation. In the past it has used straight-line depreciation over a twelve-year period with no scrap or salvage value for these assets. However, with technology changing rapidly, CWB questions whether it will have to replace the equipment earlier.

On April 7 received its utilities bill for the first quarter of 2018 – $800.

The tax rate is 20%.

Cherry & White Bike Company

Post-Closing Trial Balance

12/31/2017

Account Title Debit Credit
Cash $33,311  
Store supplies 460  
Prepaid rent 1,000  
Prepaid insurance 1,650  
Inventory 2,750  
Equipment 14,500  
Accumulated depreciation – equipment    $4,350
Accounts payable   8,724
Utilities payable   775
Salaries payable   1,900
Interest payable   1,800
Loans payable   15,000
Capital stock   20,000
Retained Earnings   1,122
  Totals $53,671 $53,671

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