Accounting Cycle Project and Accounting Method Choice

Intermediate Accounting I

Accounting Project – Version 1

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, 2019. 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 2018 and must add the transactions and activities that occurred in the first quarter of 2019 as listed below. You can add accounts to the trial balance, as needed. In the first quarter of 2019 Cherry & White Bikes had the following transactions

January 1: The owners hire Nina Marton to manage the store, paying her a salary of $2,600 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 $1,600 a month, also on the 1st of the following month. Employees work 40 hours a week.

January 14: Paid utilities for 4th quarter of 2018, $775.

February 1: Installed new light fixtures and display cases in the leased store. CWB paid $1,900 for the fixtures, $150 for shipping to the store, and $400 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.

The landlord gave CWB permission to remove and dispose of the old fixtures. CWB sold the old fixtures for $200. 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 $2,800. 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.

February 10: CWB made a payment of $5,500 on its accounts payable.

March 1: CWB invests in a $4,000 3-month treasury bill paying interest of 3.0%.

March 12: One of the standard bikes sold on February 21 was returned by the customer. The bike sold for $400. 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 $190.

March 24: A customer puts down a deposit of $500 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.

a) CWB offers bike tune-ups for $80 each. CWB’s employee is an expert tune-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	14
February	36
March	42

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

Date	Transaction	Quantity	Cost per Bike
Beginning Inventory		25	$110
January 25	Sale	15
February 8	Purchase	30	$115
February 14	Sale	16
February 27	Sale	15
March 2	Purchase	28	$120
March 17	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.

c) CWB took out a five-year loan for $10,000 with an interest rate of 12% on January 1, 2018. The loan matures on January 1, 2022.

d) CWB rents its premises for $900 per month, with rent due on the 15st of the prior month.

e) CWB has a business insurance policy, which it purchased for $3,300 on July 1, 2018. The policy runs until June 30, 2019.

f) 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.

g) On March 31, CWB had $154 of supplies left in the supply room.

h) On April 7 received its utilities bill for the first quarter of 2019 - $800.

i) 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

12/31/2018

Account Title	Debit	Credit
Cash	$30,100
Store supplies	460
Prepaid rent	900
Prepaid insurance	1,650
Inventory – standard bikes (25 bikes)	2,750
Equipment	15,500
Accumulated depreciation - equipment		$4,350
Accounts payable		8,724
Utilities payable		775
Salaries payable		1,600
Interest payable		1,200
Loans payable		10,000
Capital stock		20,000
Retained Earnings		4,711
Totals	$51,360	$51,360