BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales con- tracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same. Required: a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives: (1) Revenue is recognized at the time of shipment. (2) Revenue is recognized at the time of collection. (3) Revenue is recognized at the time of production. Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively. b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales con- tracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of production. The company has only two other costs: (1) sales commissions of 10% of selling price when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at time of shipment. Selling price and all costs per unit have been constant and are likely to remain the same. Required: a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company for each of the following three alternatives: (1) Revenue is recognized at the time of shipment. (2) Revenue is recognized at the time of collection. (3) Revenue is recognized at the time of production. Note: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively. b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax purposes? c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and income statement.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter17: Activity Resource Usage Model And Tactical Decision Making
Section: Chapter Questions
Problem 6E: Elliott, Inc., has four salaried clerks to process purchase orders. Each clerk is paid a salary of...
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Transcribed Image Text:BIKE Company starts with $3,000 cash to finance its business plan of producing bike helmets
using a simple assembly process. During the first month of business, the company signs sales con-
tracts for 1,300 units (sales price of $9 per unit), produces 1,200 units (production cost of $7 per
unit), ships 1,100 units, and collects in full for 900 units. Production costs are paid at the time of
production. The company has only two other costs: (1) sales commissions of 10% of selling price
when the company collects from the customer, and (2) shipping costs of $0.20 per unit paid at
time of shipment. Selling price and all costs per unit have been constant and are likely to remain
the same.
Required:
a. Prepare comparative (side-by-side) balance sheets and income statements for the first month of BIKE Company
for each of the following three alternatives:
(1) Revenue is recognized at the time of shipment.
(2) Revenue is recognized at the time of collection.
(3) Revenue is recognized at the time of production.
Note: Net income reach of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively.
b. The method where revenue is recognized at time of collection, known as the installment method, is acceptable
for financial reporting in unusual and special cases. Why is BIKE Company likely to prefer this method for tax
purposes?
c. Comment on the usefulness of the installment method for a credit analyst in using both the balance sheet and
income statement.
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