The Cherry & White Bike Company is a small closely-held company with two owners.
ID: 2529818 • Letter: T
Question
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 considering using a 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 Lisa Marton to manage the store, paying her a salary of $2,800a 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 $2,000a month, also on the 1stof the following month.
January 14: Paid utilities for 4thquarter of 2017, $875.
February 1: Installed new light fixtures and display cases in the leased store. CWB paid $1,700for the fixtures, $200for shipping to the store, and $700to an electrician to install. The landlord gave CWB permission to remove and dispose of the old fixtures. CWB sold the old fixtures for $180. CWB anticipates being in the store for at least 4 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, which cost $5,400, if they move.
Both the display cases and light-fixtures have a six-year useful life.
March 1: CWB invests in a $2,0003-month treasury bill paying interest of 2.0%
March 12: One of the standard bikes sold was returned by the customer. The bike sold for $225. CWB paid $80for it. CWB provided a full refund. CWB’s policy is to provide a customer with a full refund within 30 day of purchase as long as the bike is returned in good condition. While the bike is in good working condition, CWB does not anticipate being able to sell the bike as new – rather it anticipates marking it down and selling it for $150.
March 24: A customer puts down a deposit of $300on a high-end racing bike that sells for $2,850. 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 rents its premises for $1,500per month, with rent due on the 15stof the prior month.
-CWB has a business insurance policy, which it purchased for $5,280on May 1, 2017. The policy runs till April 30, 2018.
CWB has a $15,000 loan outstanding at an interest rate of 12% a year, with annual interest due on January 1. The loan matures on January 1, 2021.
CWB offers bike tune-ups for $70each. CWB’s employees are experts in adjusting brakes. 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
14
February
36
March
29
CWB has the following purchases and sales of racing bikes (there were no racing bikes in beginning inventory)*:
Date
Transaction
Quantity
Cost per Bike
Sales Price per Bike
January 15
Purchase
10
$140
January 25
Purchase
15
$145
February 12
Sale
14
$635
February 13
Purchase
12
$170
March 1
Sale
20
$645
March 20
Purchase
8
$180
*All purchasers of racing bikes are given two years of complimentary tune-ups. No tune-ups on bike’s sold were performed in the current quarter.
**All purchases were made using cash except the March 20th purchase for which CWB obtained three-months credit from the bike supplier.
CWB has 25standard bikes in beginning inventory. The bikes were purchased at a price of $101each. The following purchases and sales of standard bikes occurred during the quarter:
Date
Transaction
Quantity
Cost per Bike
January 31
Sale
15
February 17
Purchase
19
$111
February 19
Sale
27
March 2
Purchase
22
$118
+All purchasers of standard bikes are given the option of buying a bike for $275,or a bike with two years of tune-ups for $350.Three of the bikes sold on February 19thwere sold with the tune-up option.No tune-ups on bike’s sold were performed in the current quarter.
CWB has 12 children’s bikes in beginning inventory. The bikes were purchased at a price of $98 each. The following purchases and sales of children’s bikes occurred during the quarter^:
Date
Transaction
Quantity
Cost per Bike
Sales Price per Bike
January 3
Purchase
30
$95
January 25
Sale
15
$175
February 12
Sale
21
$180
February 13
Purchase
15
$99
March 11
Sale
9
$175
^Tune-ups are not usually performed on children’s bikes
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 ten-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 Utilities bill for the first quarter of 2018 - $905.
- The tax rate is 20%.
Chart of Accounts
Group
Account #
Account Title
100: Assets
101
Cash
102
Accounts receivable
103
Store supplies
104
Prepaid rent
105
Prepaid insurance
106
Prepaid advertising
110
Inventory – standard bikes
111
Inventory – racing bikes
112
Inventory – children’s bikes
115
Inventory – bike supplies
120
Equipment
122
Accumulated depreciation - equipment
200: Liabilities
201
Accounts payable
205
Utilities payable
210
Unearned sales revenue
215
Unearned service revenue
220
Salaries payable
225
Taxes payable
230
Interest payable
240
Loans payable
300: Equity
301
Capital stock
310
Retained earnings
320
Dividends declared
400: Revenues
401
Sales revenue
405
Sales returns
410
Service revenue
500: Expenses
500
Cost of goods sold
505
Cost of bike supplies
511
Salaries expense
512
Utilities expense
513
Selling expense
514
Administrative expense
515
Rent expense
516
Insurance expense
517
Store supplies expense
518
Advertising expense
520
Depreciation expense
530
Interest expense
540
Tax expense
600: Other
601
Income summary
Cherry & White Bike Company
Post-Closing Trial Balance
12/31/2017
Account Title
Debit
Credit
Cash
$33,311
Store supplies
460
Prepaid rent
1,500
Prepaid insurance
1,560
Inventory – standard bikes (25 bikes)
2,525
Inventory – children’s bikes (12 bikes)
1,176
Equipment
14,500
Accumulated depreciation - equipment
$4,350
Accounts payable
8,724
Utilities payable
875
Salaries payable
2,000
Interest payable
1,800
Loans payable
15,000
Capital stock
20,000
Retained Earnings
6,633
Totals
$55,032
$55,032
Month
Number of
Tune-Ups
January
14
February
36
March
29
Explanation / Answer
Here before I submit the answer I would like to note that the Post-closing Trial balance as on 12/31/2107 did not match with the Equipment and Accumulated Depreciation. As peer the Trial balance Equipment Cost would be $18850 not $14500. Then only the Trial balance would match. Please make it correct and send then I am ready to submit the answer at the earliest.
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