Derek, Inc., a party rental business, completed its first year of operations on December 31, 2011. Because this is the end of the annual accounting period, the company bookkeeper prepared the following tentative income statement:

Income Statement, 2011

Rental revenue ................$109,000

Expenses

Salaries and wages expense ........... 26,500

Maintenance expense .............. 12,000

Rent expense .................. 8,800

Utilities expense ................ 4,300

Gas and oil expense .............. 3,000

Miscellaneous expenses (items not listed elsewhere) .. 1,000

Total expenses ................. 55,600

Income ................... $ 53,400

You are an independent CPA hired by the company to audit the company's accounting systems and review the financial statements. In your audit, you developed additional data as follows:

a. Wages for the last three days of December amounting to $560 were not recorded or paid.

b. Derek estimated telephone usage at $440 for December 2011, but nothing has been recorded or paid.

c. Depreciation on rental autos, amounting to $24,000 for 2011, was not recorded.

d. Interest on a $15,000, one-year, 8 percent note payable dated October 1, 2011, was not recorded. The 8 percent interest is payable on the maturity date of the note.

e. The Unearned Rental Revenue account includes $4,100 of revenue to be earned in January 2012.

f. Maintenance expense excludes $1,100 that is the cost of maintenance supplies used during 2011.

g. The income tax expense is $5,800. Payment of income tax will be made in 2012.

Required:

1. What adjusting entry for each item (a) through (g) do you recommend Derek should record at December 31, 2011? If none is required, explain why.

2. Prepare a corrected income statement for 2011 in good form, including earnings per share, assuming that 8,000 shares of stock are outstanding all year. Show computations.

3. Compute the net profit margin based on the corrected information. What does this ratio suggest? If the average net profit margin for the industry is 18 percent, what might you infer about Derek?