Bythindseitty : BIKE Company starts with $3,000 to finance its business plan of producing bike helmets using a simple assembly process. During the first month of business, the company signs sales contracts 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 time of shipment.
(2) Revenue is recognized at time of collection.
(3) Revenue is recognized at time of production.

Hint: Net income for each of these three alternatives is (1) $990, (2) $810, and (3) $1,080, respectively.

Attempt at solution:
(1) Sales revenue (1,100*$9)=$9,900
COGS (1,100*$7)=$7,700
Gross margin = $2,200
Sales commissions (900*$9*10%)=$810
Shipping costs ($0.20*1,100)=$220
Income = $1,170



(2) Sales revenue (900*$9)=$8,100
COGS (900*$7)=$6,300
Gross margin = $1,800
Commissions (900*$9*10%)=$810
Shipping costs (1,100*$0.20)=$220
Income = $770

(3) Sales revenue (1,200*$9)=$10,800
COGS (1,200*$7)=$8,400
Gross margin = $2,400
Commissions (900*9*10%)=$810
Shipping costs (1,100*$0.20)=$220
Income = $1,370

Details: I can't figure the income statement out to save my life. There is no mention of a tax rate, so I assume that the net income hint given is pretax. If anyone can help me get at the right direction, that would be great. I can probably get the balance sheet done myself if I get to the right net income to apply to retained earnings.

There are two other questions as well:

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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