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 CWBs 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 CWBs 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 CWBs 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 $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 $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 $1,700 for the fixtures, $200 for shipping to the store, and $700 to an electrician to install. The landlord gave CWB permission to remove and dispose of the old fixtures. CWB sold the old fixtures for $180. CWB anticipates being in the store for at least 4 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. CWBs 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 $300 on a high-end racing bike that sells for $2,850. 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 $1,500 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 till April 30, 2018. CWB has a $15,000 loan outstanding at an interest rate of 12% a year, with annual interest due on January 1. The loan matures on January 1, 2021. CWB offers bike tune-ups for $70 each. CWBs 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 14 February 36 March 29 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 $140 January 25 Purchase 15 $145 February 12 Sale 14 $635 February 13 Purchase 12 $170 March 1 Sale 20 $645 March 20 Purchase 8 $180 *All purchasers of racing bikes are given two years of complimentary tune-ups. No tune-ups on bikes 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 15 February 17 Purchase 19 $111 February 19 Sale 27 March 2 Purchase 22 $118 +All purchasers of standard bikes are given the option of buying a bike for $275, or a bike with two years of tune-ups for $350. Three of the bikes sold on February 19th were sold with the tune-up option. No tune-ups on bikes sold were performed in the current quarter. CWB has 12 childrens bikes in beginning inventory. The bikes were purchased at a price of $98 each. The following purchases and sales of childrens bikes occurred during the quarter^: Date Transaction Quantity Cost per Bike Sales Price per Bike January 3 Purchase 30 $95 January 25 Sale 15 $175 February 12 Sale 21 $180 February 13 Purchase 15 $99 March 11 Sale 9 $175 ^Tune-ups are not usually performed on childrens 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 Utilities bill for the first quarter of 2018 - $905. - The tax rate is 20%. Chart of Accounts Group Account # Account Title 100: Assets 101 Cash 102 Accounts receivable 103 Store supplies 104 Prepaid rent 105 Prepaid insurance 106 Prepaid advertising 110 Inventory standard bikes 111 Inventory racing bikes 112 Inventory childrens bikes 115 Inventory bike supplies 120 Equipment 122 Accumulated depreciation - equipment 200: Liabilities 201 Accounts payable 205 Utilities payable 210 Unearned sales revenue 215 Unearned service revenue 220 Salaries payable 225 Taxes payable 230 Interest payable 240 Loans payable 300: Equity 301 Capital stock 310 Retained earnings 320 Dividends declared 400: Revenues 401 Sales revenue 405 Sales returns 410 Service revenue 500: Expenses 500 Cost of goods sold 505 Cost of bike supplies 511 Salaries expense 512 Utilities expense 513 Selling expense 514 Administrative expense 515 Rent expense 516 Insurance expense 517 Store supplies expense 518 Advertising expense 520 Depreciation expense 530 Interest expense 540 Tax expense 600: Other 601 Income summary Cherry & White Bike Company Post-Closing Trial Balance 12/31/2017 Account Title Debit Credit Cash $33,311 Store supplies 460 Prepaid rent 1,500 Prepaid insurance 1,560 Inventory standard bikes (25 bikes) 2,525 Inventory childrens bikes (12 bikes) 1,176 Equipment 14,500 Accumulated depreciation - equipment $4,350 Accounts payable 8,724 Utilities payable 875 Salaries payable 2,000 Interest payable 1,800 Loans payable 15,000 Capital stock 20,000 Retained Earnings 6,633 Totals $55,032 $55,032 required: Prepare the journal entries for all transactions in the general journal. Financial statements including, income statement, balance sheet, statement of changes in stockholders equity; A memo to the owners of Cherry & White Bike Company explaining and justifying the following accounting choices