Crystal Mullinex owns and operates Crystal's Day Spa. Inc. 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. Crystal's secretary, Tarin, under her direction, maintained the records. Each year they developed a statement of profits on a cash basis; no balance sheet w as prepared. Upon request.

Crystal provided the other company with the following statements for 2003 prepared b\ Tarin:

Upon agreement of the parties, you have been asked to examine the financial figures for 2003. 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, 2003:

a. Of the $ 1 1 5.000 in spa fees collected in 2003, $32,000 was for services performed prior to 2003.

b. At the end of 2003, spa fees of $9,000 for services performed during the year were uncollected.

c. Office equipment owned and used by Crystal cost $5,000. Depreciation was estimated at $500 annually.

d. A count of office supplies at December 3 1 , 2003, reflected $200 worth of items purchased during the year that were still on hand. Also, the records for 2002 indicate that the supplies on hand at the end of that year were about $125.

e. At the end of 2003, the secretary whose salary is $ 1 8,000 per year had not been paid for December because of a long trip that extended to January 15, 2004.
/ A $ 1 ,400 phone bill received for December 2003 was not paid until January 1 1 , 2004.
g. The $13,000 office rent paid was for 13 months (it included the rent for January 2004).
Required: 1. On the basis of this information, prepare a corrected income statement for 2003 (ignore income taxes). Show your computations for any amounts changed from those in the statement prepared by Crystal's secretary. (Suggested solution format with four-column headings: Items; Cash Basis per Crystal's Statement. $; Explanation of Changes; and Corrected Basis, $.) 2. Write a memo to support your schedule prepared in requirement ( 1 ). The purpose should be to explain the reasons for your changes and to suggest other important items that should be considered in the pricing decision.

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Spa fees collected Expenses paid: CRYSTAL'S DAY SPA, INC. Statement of Profits 2003 Rent for office space Utilities expense Telephone expense Office salaries expense Office supplies expense Miscellaneous expenses Total expenses Profit for the year $13,000 360 2,200 22,000 900 2,400 $115,000 40.860 $ 74.140