Question
Period 2 Quiz Darya McNeil owns and operates Darya's Day Spa.She has decided to sell the business and retire.She has had discussions with a representative
Period 2 Quiz
Darya McNeil owns and operates Darya's 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:
Darya's 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 company's 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 corrected income statement for 2015 (ignore income taxes).
3. Write memo highlighting important items that should be considered in the pricing decision.
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