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 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.

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	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 21^st 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 15^st 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

NEED Journal Entries, Income Statement, Statement of retained earnings, and Balance Sheet

Answer 1

In the books of Cheery and White Bike Company:

Date	Account Titles	Debit	Credit
2018		$	$
Jan 1	Salaries Payable	1,900
	Cash		1,900
Jan 14	Utilities Payable	775
	Cash		775
Jan 15	Prepaid Rent	1,000
	Cash		1,000
Jan 31	Cash ( 18 tune-ups x $ 80)	1,440
	Service Revenue		1,440
Jan 31	Cash ( 15 bikes x $ 400)	6,000
	Sales Revenue		6,000
Jan 31	Cost of Goods Sold ( 15 bikes x $ 110)	1,650
	Inventory		1,650
Jan 31	Salaries Expense	4,700
	Salaries Payable		4,700
Jan 31	Rent Expense	1,000
	Prepaid Rent		1,000
Feb 1	Salaries Payable	4,700
	Cash		4,700
Feb 1	Fixtures	2,323
	Furniture	3,604
	Cash		5,927
Feb 4	Inventory	2,300
	Cash		2,300
Feb 10	Cash ( 13 bikes x $ 400)	5,200
	Sales Revenue		5,200
Feb 10	Cost of Goods Sold ( 10 x $ 110 + 3 x $ 115)	1,445
	Inventory		1,445
Feb 15	Prepaid Rent	1,000
	Cash		1,000
Feb 21	Cash ( 11 x $ 400) + ( 4 x $ 500)	6,400
	Sales Revenue		6,000
	Unearned Revenue		400
Feb 21	Cost of Goods Sold ( 15 x $ 115)	1,725
	Inventory		1,725
Feb 28	Cash ( 36 x $ 80)	2,880
	Service Revenue		2,880
Feb 28	Rent Expense	1,000
	Prepaid Rent		1,000
Feb 28	Salaries Expense	4,700
	Salaries Payable		4,700
Mar 1	Salaries Payable	4,700
	Cash		4,700
Mar 1	Investments ( $ 4,000 x (1 / 1.03)3 )	3,661
	Cash		3,661
Mar 2	Inventory	3,360
	Accounts Payable		3,360
Mar 15	Prepaid Rent	1,000
	Cash		1,000
Mar 15	Cash	8,000
	Sales Revenue		8,000
Mar 15	Cost of Goods Sold	2,390
	Inventory		2,390
Mar 24	Cash	700
	Unearned Revenue		700
March 31	Cash	2,400
	Service Revenue		2,400

Contd. :

March 31	Rent Expense	1,000
	Prepaid Rent		1,000
March 31	Salaries Expense	4,700
	Salaries Payable		4,700
March 31	Insurance Expense ( 3,300 / 12 * 3 )	825
	Prepaid Insurance		825
March 31	Interest Expense ( $ 15,000 x 12 % x 3 / 12 )	450
	Interest Payable		450
March 31	Utilities Expense	800
	Utilities Payable		800

2.

Cherry and White Bike Company
Income Statement
For the quarter ended March 31, 2018
	$	$
Sales Revenue	25,200
Service Revenue	6,720
Total Revenue		31,920
Less: Expenses
Cost of Goods Sold	2,390
Salaries Expense	14,100
Rent Expense	3,000
Insurance Expense	825
Utilities Expense	800
Depreciation Expense	141
Total Expenses		26,076
Operating Income		5,844
Less Interest Expense		450
Income before Taxes		5,394
Income Tax Expense		1,079
Net Income		4,315

3.

Cherry and White Bike Company
Statement of Retained Earnings
For the year quarter ended March 31, 2018
Retained Earnings, January 1, 2018	$ 1,122
Net Income	4,315
Dividends	0
Retained Earnings, March 31, 2018	$ 5,437

4.

Cherry and White Bike Company
Balance Sheet
March 31, 2018
Assets	$	Liabilities and Equity	$
Cash	39,368	Accounts Payable	12,084
Store Supplies	460	Salaries Payable	4,700
Prepaid Rent	1,000	Utilities Payable	800
Prepaid Insurance	825	Income Taxes Payable	1,079
Inventory	1,200	Unearned Revenue	1,100
Investment	3,661	Interest Payable	2,250
Equipment,net	10,150	Loans Payable	15,000
Furniture and Fixtures	5,786	Capital Stock	20,000
		Retained Earnings	5,437
Total Assets	62,450	Total Liabilities and Equity	62,450