Brightwater Bike Repair’s first full year

Fictional case

In F01 you kept the books for Brightwater Bike Repair’s first month, July 2026. Mateo Ruiz has kept them since. In 2027 Brightwater moved to a bigger workshop with a small shop at the front, and from March it sold commuter bikes and accessories as well as repairing bikes. Mateo has recorded the year’s transactions; you will make the year-end adjustments and prepare Brightwater’s first full set of annual statements for its bank, Harbour Credit Union. Brightwater, Mateo and every figure are fictional.

Brightwater Bike RepairBalance sheet at 31 December 2026

Current assets
Cash	$17,450
Accounts Receivable	2,860
Allowance for Doubtful Accounts	(140)
Supplies	520
Prepaid Insurance	360
Total current assets	$21,050
Equipment
Equipment	$4,800
Accumulated Depreciation—Equipment	(480)
Total equipment	$4,320
Total current assets	$21,050
Total equipment	4,320
Total assets	$25,370
Current liabilities
Accounts Payable	$1,180
Wages Payable	1,040
Interest Payable	150
Unearned Revenue	600
Income Taxes Payable	1,050
Short-Term Notes Payable	5,000
Total liabilities	$9,020
Equity
Common Stock	$12,000
Retained Earnings	4,350
Total equity	$16,350
Total liabilities	$9,020
Total equity	16,350
Total liabilities and equity	$25,370

Short-term notes payable is the one-year note from Harbour Credit Union, due on 1 July 2027 with $300 of interest.

The year’s transactions, in summary (Mateo’s entries are already in the trial balance below):

On 1 March, borrows $12,000 from Harbour Credit Union at 7%: $3,000 is repaid each 1 March from 2028, with the year’s interest.
On 1 March, buys a hydraulic work stand and e-bike diagnostic tools for $9,000 in cash.
Repairs and servicing: $41,600 paid at the counter and $26,800 invoiced to the courier company, the rental fleet and regular customers.
Cash collected from customers on account.
On 14 August, Pedalpost, a courier start-up, closes owing $380; Brightwater writes the invoice off.
Service plans: $1,900 paid in advance; tune-ups worth $2,100 delivered (including last year’s $600).
Service-plan tune-ups delivered.
Commuter bikes bought on account (three deliveries).
Accessories bought on account.
On 20 April, buys an ex-demonstration e-bike for the shop floor for $1,600 in cash.
Retail sales, paid by card: 24 bikes at $640 and accessories of $9,840.
Refunds for faulty accessories returned by customers (the faulty items were thrown away).
Cost of the bikes sold (FIFO, perpetual).
Payments to suppliers on account (bikes, accessories, parts).
Repair parts and workshop supplies bought on account.
Mechanics’ wages for the year (Brightwater’s only employees; Mateo serves in the shop himself); $1,320 earned in late December is paid on 4 January.
Workshop and shop rent, $1,500 a month.
Utilities, all paid.
Advertising.
Card-processing fees.
On 1 July, renews the liability insurance for 1 July 2027 – 30 June 2028.
On 1 July, repays the one-year note with its $300 of interest.
On 1 October, before the sale, records the stand’s depreciation for January–September 2027 ($25 a month).
On 1 October, sells the original repair stand (cost $1,500, $25 a month of depreciation since July 2026) for $700 in cash.
On 15 April, pays the 2026 income tax owed.
Estimated income tax paid for 2027.
Dividends declared and paid to Mateo, $400 a month.

Unadjusted trial balance at 31 December 2027
Account	Debit ($)	Credit ($)
Cash	14,379
Accounts Receivable	6,500
Allowance for Doubtful Accounts	240
Inventory	10,420
Supplies	8,620
Prepaid Insurance	1,140
Equipment	12,300
Accumulated Depreciation—Equipment		330
Accounts Payable		2,050
Wages Payable		1,320
Unearned Revenue		400
Notes Payable		12,000
Common Stock		12,000
Retained Earnings		4,350
Dividends	4,800
Repair Revenue		70,500
Sales Returns and Allowances	600
Retail Sales Revenue		25,200
Wages Expense	33,600
Cost of Goods Sold	9,440
Rent Expense	18,000
Utilities Expense	2,460
Advertising Expense	1,800
Depreciation Expense	225
Card and Platform Fees Expense	1,051
Interest Expense	150
Loss on Sale of Equipment	425
Income Tax Expense	2,000
Total	128,150	128,150

The allowance has a debit balance: the $380 written off in August was more than the $140 left from 2026. Accumulated depreciation includes the stand’s depreciation to the date of sale, then the removal of all $375 of it.

What Mateo knows on 31 December 2027:

A count finds accessories costing $1,450 on the shelves; the rest of the $6,300 bought was sold or returned.
The ex-demonstration e-bike (cost $1,600) is still unsold; it can be sold for $1,250, with $100 of selling costs.
A count finds $640 of repair parts and supplies on hand.
Insurance: the old policy ran to 30 June 2027; the renewal costs $780 for twelve months from 1 July.
Depreciation still to record: the original equipment other than the sold stand at $55 a month for the whole year; the new equipment at $150 a month from March.
The aging of receivables (below) gives the allowance needed.
Interest has built up on the new loan for March–December.
The $3,000 instalment due on 1 March 2028 is a current liability.
Income tax for 2027 is 25% of income before tax; $2,000 has been paid.

Commuter bikes bought in 2027
Delivery	Bikes	Cost per bike ($)
1 March	10	380
1 June	12	400
1 September	8	420

Brightwater sold 24 bikes at $640 each. It uses FIFO for the bikes, recorded perpetually.

Accounts receivable at 31 December 2027, by age
Age	Amount ($)	Expected not to be collected
Not yet due	4,200	1%
1–30 days overdue	1,300	5%
31–90 days overdue	600	20%
Over 90 days overdue	400	50%

Brightwater’s accountant treats the mechanics’ wages and the repair parts used (Supplies Expense) as the cost of its repair services, so both are part of cost of sales with the cost of goods sold. Income tax is 25% of income before tax (an assumption for the case). Brightwater follows US GAAP: interest paid is an operating cash flow.

What you will produce

The inventory costed (FIFO, a periodic count and a write-down) and the gross margin on retail sales.
The allowance for doubtful accounts and the year’s bad debt expense from an aging.
Depreciation for the year and the loss on the stand Brightwater sold.
The year-end liabilities: interest and the current portion of the new loan.
Income tax, a multi-step income statement, a statement of changes in equity and a comparative classified balance sheet.
A statement of cash flows (indirect method, with the operating section also by the direct method), the checks that tie the statements together, and a short note to Mateo.

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