Darya McNeil owns and operates Daryas Day Spa. She has decided to sell the business and retire. She has had discussions with a representative from a regional chain of day spas. The discussions are at the complex stage of agreeing on a price. Among the important factors have been the financial statements of the business. Each year they develop a statement of profits on a cash basis; no balance sheet was prepared. Darya provided the other company with the following statement for 2015:

Daryas Day Spa Income Statement for 2015
Spa Fees Collected		$1,215,000
Expenses paid:
Rent for Office Space	$130,000
Utility Expense	43,600
Telephone Expense	12,200
Salaries Expense	562,000
Supplies Expense	31,900
Miscellaneous Expenses	12,400
Total Expenses		792,100
Profit for 2015		$422,900

You have been asked to examine the financial figures for 2015. The other companys representative said, I question the figures because, among other things, they appear to be on a 100 percent cash basis. Your investigations revealed the following additional data at December 31, 2015.

a. Of the $1,215,000 in spa fees collected in 2015, $142,000 was for services performed prior to 2015.

b.At the end of 2015, spa fees of $29,000 for services performed during the year were uncollected.

c.Office equipment owned and used by Darya cost $205,000. Depreciation was estimated at $20,500 annually.

d.A count of suppliers at December 31, 2015, reflected $5,200 worth of items purchased during the year that were still on hand. Also, the records for 2014 indicated that the suppliers on hand at the end of 2014 were $3,125.

e.At the end of 2015, the secretary whose salary is $48,000 per year had not been paid for December because of a long trip that extended to January 15, 2016.

f.The December 2015 telephone bill for $1,400 has not been recorded or paid. In addition, the $12,200 amount on the statement of profits includes payment of the December 2014 bill of $1,800 in January 2015.

g.The $130,000 office rent paid was for 13 months (it included the rent for January 2016).

Required

1.Complete journal entries for a g above.

2.Prepare a corrected income statement for 2015 (ignore income taxes).

3.Write a memo highlighting important items that should be considered in the pricing decision.