Question

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.

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

HOW WOULD YOU RECORD THESE ENTRYS????

Answer 1

Dear Student the following is the genearl ledger
DATE	ACCOUNT TITLES	DEBIT	CREDIT
15-Mar	PURCHASE	1680
	TO CREDITORS		1680
25-Mar	PURCHASE	1085
	TO CREDITORS		1085
30-Apr	CASH	1530
	TO BIKE TUEN UPS		1530
12-Apr	CASH	5350
	TO SALES		5350
13-Apr	PURCHASE	2240
	TO CREDITORS		2240
01-May	CASH	8100
	TO SALES		8100
31-May	CASH	2720
	TO BIKE TUEN UPS		2720
01-Jun	SALARY	2800
	TO CASH		2800
15-Jun	CREDITORS	1680
	TO CASH		1680
25-Jun	CREDITORS	2635
	TO CASH
30-Jun	CASH	1955
	TO BIKE TUEN UPS		1955
13-Jul	CREDITORS	2240
	TO CASH		2240
01-Jul	SALARY	2800
	TO CASH		2800
01-Jul	LIGHT FIXTURES	1160
	DISPLAY CASES	7600
	TO CASH		8760
01-Aug	SALARY	2800
	TO CASH		2800
01-Aug	DEPOSIT	4000
	TO CASH		4000
20-Aug	PURCHASE	1620
	TO CREDITORS		1620
31-Aug	CASH	1190
	TO BIKE TUEN UPS		1190
01-Sep	SALARY	2800
	TO CASH		2800
02-Sep	PURCHASE	2340
	TO CREDITORS		2340
30-Sep	CASH	1530
	TO BIKE TUEN UPS		1530
01-Oct	SALARY	2800
	TO CASH		2800
16-Oct	CASH	9350
	TO SALES		9350
21-Oct	PURCHASE	2940
	TO CASH		2940
31-Oct	CASH	255
	TO BIKE TUEN UPS		255
01-Aug	DEPOSIT	2000
	TO CASH		2000
01-Nov	SALARY	2800
	TO CASH		2800
01-Nov	CASH	4950
	TO SALES		4950
20-Nov	CREDITORS	1620
	TO CASH		1620
01-Dec	SALARY	2800
	TO CASH		2800
02-Dec	CREDITORS	2340
	TO CASH		2340
15-Dec	CASH	7840
	TO SALES		7840
12-Dec	SALES RETURNS	220
	TO CASH		220
19-Dec	CASH	300
	TO ADVANCE FROM CUSTOMER		300
31-Dec	CASH	340
	TO BIKE TUEN UPS		340
30-Dec	DIVIDEND	600
	TO CASH		600
31-Dec	SALARY	2800
	TO SALARY PAYABLE		2800
31-Dec	DEPRECIATION	2092
	TO NEW LIGHT FIXTURES		610
	TO DISPLAY CASES		1520
31-Dec	CASH	190
	TO SALE OF EQUIPMENT		190
31-Dec	CASH	220
	TO INTEREST ON DEPOSIT		200
	TO INTEREST ON TREASURY BILL		20
	CHERRY & WHITE BIKE COMPANY
	STATEMENT OF INCOME
	FOR THE PERIOD ENDED 31-12-2017
	PARTICULARS	AMOUNT ($)
	SALES	47826
	SALES OF RACING BIKES	35370
	BIKES TUNE UPS	9520
	COST OF GOODS SOLD	15300
	COGS OF RACING BIKES	11905
	GROSS PROFIT	65511
	Add:
	OTHER INTEREST INCOME	230
	LESS: EXPENSES
	SALARIES	6800
	SALARIES TO LISA	19600
	UTILITIES EXPENSES	2600
	RENT EXPENSES	3225
	INSURANCE EXP	800
	STORE SUPPLIES EXP	466
	ADVERTISING EXP	1000
	INTEREST EXP	1500
	DEPRECIATION	2092
	DIVIDEND PAID	600
	PROFIT BEFORE TAX	27058
	LESS: TAX @30%	8117.4
	PROFIT AFTER TAX	18940.6
	CHERRY & WHITE BIKE COMPANY
	BALANCE SHEET
	AS OF DEC'31,2017
	ASSETS	$
	CASH	30106
	STORE SUPPLIERS	460
	PREPAID RENT'	7600
	PREPAID INSURANCE	1560
	DEPOSITS	6000
	INVENTORY - STANDARD BIKES	2535
	INVENTORY - RACING BIKES	2610
	INVENTORY - CHILDREN BIKES	1243
	INVENTORY - BIKE SUPPLIES
	EQUIPMENT	26635
	NEW LIGHT FIXTURES	610
	DISPLAY CASES	6080
	TOTAL ASSETS	85439
	LIABILITIE AND EQUITY
	ACCOUNT PAYABLE	8724
	UTILITIES PAYABLE	875
	SALARIES PAYABLE	2300
	INTEREST PAYABLE	2300
	LOANS PAYABLE	1500
	SALARIES PAYABLE	2800
	CAPITAL STOCK	2000
	RETAIN EARNINGS	18940.6
	INCOME TAX PAYABLE	8117.4
	DIFF	37882
	TOTAL LIABILITIES	47557