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.