Question

LimeBike is a start-up founded in 2017 located in San Mateo, California. Its mission is to make shared bicycles accessible and affordable. The company has taken the basic idea of shared bicycles and eliminated the need to return the bike to a docking station, which may not be near the cyclist’s destination.

LimeBike charges $1 per 30 minutes of riding. Students receive a discounted rate of $0.50 per ride.

To use LimeBike, you first use the LimeBike app to locate one of the citrus-colored bikes near your location. Once you are at the bike, you scan the QR code on the bike or enter the bike’s plate number into the app to unlock the bike. When you are finished using the bike, you park the bike by a bike rack or post – anywhere that is legal and visible. Once you press down the back wheel lock, the trip is finalized and your payment is processed – all within the LimeBike app.

LimeBike operates the bicycle networks within cities, eliminating the need for cities to maintain the bikes or deal with other logistics. The shared bicycle network is not dependent on government funding, making it appealing to cities with tight budgets.

LimeBike just raised $12 million in funding from investors to expand its operations. It is set to begin operating in as-of-yet undisclosed cities in April or May of 2017.

You are one of the only accountants in LimeBike headquarter's office.

The company’s CEO, Toby Sun, has tasked you with forming the company's the company’s accounting policies.

For the discussion post, write an email to the company CEO and address all of the following typical company scenarios and whether each item should be expensed or capitalized at LimeBike:

The cost of customized bikes. This includes the bike's purchase price, shipping, assembly and sales tax.

Development costs of the smart phone app for locating, paying, and returning bikes. (Resource: Accounting for Software Development)

Salary of the salesperson who works to get cities to adopt the Lime Bike program.

Replacement tires for bikes.

Routine bike maintenance including chain lubrication, brake pad replacement, and drive train cleaning

Electricity and other utilities in administrative offices

Somewhere in your email, also address why this classification is important. Be sure to include how these decisions would impact the company’s balance sheet and income statement.

Answer 1

Dear,

Toby Sun,

CEO, Lime Bike, San Mateo, California.

First of all, I congratulate you and wish you all the bests for such an initiative in the form a start-up company. As I am here appointed to do my job as an accountant of your company, to formulate the company's accounting policies regarding expenses and capitals. I am happy to serve you.

Business is always a risk associated job to do. But, risk brings the possibilities of gain. Your company seems to be a good idea that you should definitely go and work on. It will prove to be a worth making investments when done with proper care. And for that careful investment in the business, we need a proper accounting and investments policy.

Your company's various expenses whether large or small, long-term or short-term, fixed or variable, accrued or outstanding are all needed to be ascertained in the accounting system accordingly on the accrual basis. Periodic expenses or incomes should be recorded in the year for which it is made, not in the year it is, was, or will be paid. Non-Periodic expenses or incomes should be recorded as assets or liabilities of the company. All the initial investments or any additional should be capitalised at once it is made. Your company may have following types of expenses:

The cost of customized bikes. This includes the bike's purchase price, shipping, assembly and sales tax. As the Bikes are the vital thing in which the main business circulates on, all the initial expenses made on the purchase of bikes and the cost of bikes itself will be recorded as an asset of the company. Any further expenses made on repairing or maintenance of bike after the purchase is finished will be taken into account as a general repair expense.

Development costs of the smartphone app for locating, paying, and returning bikes. (Resource: Accounting for Software Development), this cost is a one time expense made at the start of the business, so it should be capitalised as assets of the company. You may charge it in instalment from the profit and loss account as depreciation.

Salary of the salesperson who works to get cities to adopt the Lime Bike program. It is a periodic expense and so it should be taken into account when it is paid, to be reflected in P/L Account. In case, it is prepaid or outstanding for any month in an accounting year, it should be taken as a prepaid or outstanding expense which will be reflected as 'Prepaid Expense' at the asset side or as 'Outstanding Expense' at the liability side of the Balance Sheet.

Replacement tires for bikes. This should be treated as a general expense.

Routine bike maintenance including chain lubrication, brake pad replacement, and drive train cleaning, all these expenses are to be treated as a general expense which will be reflected in P/L Account of financial statements of the company.

Electricity and other utilities in administrative offices. these all are the routine expenses, general expenses.

Thank you.