Derek, Inc., completed its first year of operations on December 3 1 , 2004. Because this is the end of the annual accounting period, the company bookkeeper prepared the following tentative income statement:

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 $3 10 were not recorded or paid.

b. The $400 telephone bill for December 2004 has not been recorded or paid.

c. Depreciation on rental autos, amounting to $23,000 for 2004, was not recorded.

d. Interest on a $20,000, one-year, 10 percent note payable dated October 1. 2004. was not recorded. The 10 percent interest is payable on the maturity date of the note.

e. The Unearned Rental Revenue account includes $4,000 revenue to be earned in January 2005.

/ Maintenance expense excludes $1,000, which is the cost of maintenance supplies used during 2004.

g. The income tax expense is $7,000. Payment of income tax will be made in 2005.

Required: 1. What adjusting entry for each item

(a) through (g) do you recommend Derek should record at December 3 1 , 2004? If none is required, explain why. 2. Prepare a corrected income statement for 2004 in good form including earnings per share, assuming that 7.000 shares of stock are outstanding. 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?

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Income Statement, 2004 Expenses Rental revenue Salaries and wages expense $114.000 $28,500 Maintenance expense 12,000 Rent expense 9,000 Utilities expense 4,000 Gas and oil expense 3,000 Miscellaneous expenses (items not listed elsewhere) 1,000 Total expenses Income 57,500 $ 56,500