Accounting Services for Wheelie Cool Bicycles

General:

You have recently started your own accounting firm and have been engaged by Wheelie Cool Bicycles (“WCB”), which is a new business that commenced operations on April 1, 2020. WCB manufacturers a variety bicycles and sells them to local shops across Canada. One of the owners, who is the company spokesperson, has reached out to your firm for some assistance in preparing WCB’s annual financial statements for the fiscal year ended June 30, 2021. The demand for WCB’s bikes continues to grow and the company needs to expand in order to produce a sufficient supply. As such, the owners are working with a local bank to obtain a loan in order to finance this growth. WCB needs to submit financial statements to the local bank, as part of its loan application.

The owners have tried to prepare the financial statements themselves; however, they keep spinning their wheels and have decided to ask for help. They have outlined their questions below and have requested a brief memo with your responses and recommendations by November 21, 2021. When performing calculations, please explain your process for the owners’ reference. For example, if you use a filter or an “if” statement in Excel, describe how you used these tools. Ideally, the owners should be able to use your description to re-perform the procedure and produce the same result.

Questions:

1. The owners have provided you with sales data that their system has recorded since they commenced operations. WCB ships products to local bike shops with FOB shipping point terms. The company does not offer any sales discounts, but just asks that the invoice is paid in 30 days. Based on this information, how much revenue should be recognized during the 2021 fiscal year? Please explain your calculations.

2. Based on the sales data, does WCB need to record any deferred revenue at the end of the 2021 fiscal year? If yes, explain why and calculate the amount that should be reported on the balance sheet. Don’t forget to outline your calculations. If no, explain why and give an example of when WCB may encounter a transaction that involves deferred revenue.

3. A particular type of activity has been grinding the owners’ gears. They are completely confused and do not know the appropriate accounting treatment. Customers placed orders, but did not provide payment and WCB was unable to ship the products before the year end date. The owners would like you to provide some guidance on how to account for this activity and the rationale that supports your recommendation.

 

4. Using the data, what amount should be reported as accounts receivable on the balance sheet as at the end of the 2021 fiscal year? Please explain how you calculated this balance.

5. Calculate the amounts that should be reported in the following accounts receivable buckets:

(1) 0-30 days outstanding, (2) 31-60 days outstanding, (3) 61-90 days outstanding, (4) 91-120 days outstanding, and (5) >120 days outstanding. Please outline the process you used to
calculate these amounts.

6. The owners would appreciate some assistance in calculating the bad debt expense for the year. Industry benchmarks indicate that companies record bad debt expense as 1% of sales or the following percentages if the aging method is used: 

 

 

WCB has not decided whether it is going to use the percentage of sales or the aging method. As such, the owners would like you to calculate the bad debt expense using both approaches. Please remember to explain your calculations. The owners would also like to know what factors that they should consider when determining the correct approach.

7. The loan officer at the bank has asked WCB to assess its ability to collect cash from its customers. This is important because the company needs cash flow in order to make the loan
payments. The owners have done some research and have found that comparable companies report the following accounts receivable buckets:

 

 

The above percentages reflect the portion of accounts receivable that corresponds to each bucket. For example, these percentages can be interpreted as follows: if the comparable company has $1 million of accounts receivable, then $750,000 of this balance has typically been outstanding for only 0-30 days. How does WCB compare to these other companies within the same industry? How would you assess WCB’s ability to convert accounts receivable into cash? Regardless of whether there is a collection problem, how could the owners encourage customers to pay in a timelier manner?