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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 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 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 1 st of the following month. Employees
work 40 hours a week.
January 14:
Paid utilities for 4 th quarter of 2017, $775.
February 1:
Installed new light fixtures and display cases in the leased store. CWB paid
$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 $4,000 3-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.
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
January
February
March
Number of
Tune-Ups
18
36
30
b) CWB has the following purchases and sales of bikes during the quarter+:
Date
Beginning Inventory
January 31
February 4
February 10
February 21
March 2
March 15
Transaction
Sale
Purchase
Sale
Sale
Purchase
Sale
Quantity
25
15
20
13
15
28
20
Cost per
Bike
$110
$115
$120
+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 $15,000 with an interest rate of 12% on January 1,
2017. The loan matures on January 1, 2022.
d) CWB rents its premises for $1,000 per month, with rent due on the 15 st of the prior
month.
e) CWB has a business insurance policy, which it purchased for $3,300 on July 1, 2017. The
policy runs until June 30, 2018.
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 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.
g) On April 7 received its utilities bill for the first quarter of 2018 - $800.
h) The tax rate is 20%.
Cherry & White Bike Company
Post-Closing Trial Balance
12/31/2017
Account Title
Cash
Store supplies
Prepaid rent
Prepaid insurance
Inventory
Equipment
Accumulated depreciation - equipment
Accounts payable
Utilities payable
Salaries payable
Interest payable
Loans payable
Capital stock
Retained Earnings
Totals
Debit
$33,311
460
1,000
1,650
2,750
14,500
$53,671
Credit
$4,350
8,724
775
1,900
1,800
15,000
20,000
1,122
$53,671