Question

Intermediate Accounting I

Accounting Project

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 Lisa Marton to manage the store, paying her a salary of $3,000 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 $2,000 a month, also on the 1st of the following month.

January 14:   Paid utilities for 4th quarter of 2017, $875.

February 1:    Installed new light fixtures and display cases in the leased store. CWB paid $1,800 for the fixtures, $230 for shipping to the store, and $800 to an electrician to install. The landlord gave CWB permission to remove and dispose of the old fixtures. CWB sold the old fixtures for $110. CWB anticipates being in the store for at least 3 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 $2,000 3-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 $80 for 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 $400 on a high-end racing bike that sells for $2,800. 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 $1,600 per month, with rent due on the 15st of the prior month.

-CWB has a business insurance policy, which it purchased for $5,280 on May 1, 2017. The policy runs until April 30, 2018.

CWB has a $15,000 loan outstanding at an interest rate of 10% a year, with annual interest due on January 1. The loan matures on January 1, 2021.

CWB offers bike tune-ups for $80 each. 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	12
February	35
March	30

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	$150
January 25	Purchase	15	$155
February 12	Sale	10		$635
February 13	Purchase	14	$170
March 1	Sale	20		$640
March 20	Purchase	10	$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 25 standard bikes in beginning inventory. The bikes were purchased at a price of $101 each. The following purchases and sales of standard bikes occurred during the quarter:

Date	Transaction	Quantity	Cost per Bike
January 31	Sale	10
February 17	Purchase	19	$111
February 19	Sale	25
March 2	Purchase	22	$120

+All purchasers of standard bikes are given the option of buying a bike for $285, or a bike with two years of tune-ups for $355. Three of the bikes sold on February 19th were 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	5		$175
February 12	Sale	10		$180
February 13	Purchase	15	$99
March 11	Sale	25		$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 Utility bill for the first quarter of 2018 - $945.

- The tax rate is 20%.

QUESTION: HI I have all of the journal entries done except inventory and COGS was wondering If could get help them. I cant figure out how to account for inventory and cost of goods sold. Thanks so much!

Answer 1