Question

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 2018:

Darya’s Day Spa Income Statement for 2018
Spa Fees Collected		$1,215,000
Expenses paid:
Rent for Office Space	$130,000
Utility Expense	43,600
Telephone Expense	12,200
Salaries Expense	532,000
Supplies Expense	61,900
Miscellaneous Expenses	12,400
Total Expenses		792,100
Profit for 2018		$422,900

You have been asked to examine the financial figures for 2018. 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, 2018.

Of the $1,215,000 in total spa fees collected in 2018, $142,000 was for services performed in 2017.

At the end of 2018, spa fees of $89,000 for services performed during the year were on account and should be collected in 2019.

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

A count of supplies on December 31, 2018, reflected $5,200 worth of items purchased during the year that were still on hand. Also, the records for 2017 indicated that the supplies on hand at the end of 2017 were $3,125.

At the end of 2018, the secretary whose salary is $4,000 per month had not been paid for December because of a long trip that extended into January, 2019.

The December 2018 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 2017 bill of $1,800 in January 2018.

The $130,000 office rent paid was for 13 months (it included the rent for January 2019).

Required

Complete journal entries for a – g above.

Prepare a corrected income statement for 2018 (ignore income taxes).

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

Answer 1

In the books of Darya' Day Spa:

Transaction	Account Titles	Debit	Credit
		$	$
a.	Spa Fee Revenue	142,000
	Accounts Receivable		142,000
b.	Accounts Receivable	89,000
	Spa Fee Revenue		89,000
c.	Depreciation Expense	20,500
	Accumulated Depreciation		20,500
d.	Supplies Expense	59,825
	Supplies		59,825
e.	Salaries Expense	4,000
	Salaries Payable		4,000
f.	Telephone Expense	1,400
	Accounts Payable		1,400
g.	Prepaid Rent	10,000
	Rent Expense		10,000

Corrected Income Statement:

Darya's Day Spa
Income Statement
For the year ended December 31, 2018
	$	$
Spa Fee Collected ( 1,215,000 - 142,000 + 89,000)		1,162,000
Expenses:
Rent Expense	120,000
Utility Expense	43,600
Telephone Expense	11,800
Salaries Expense	536,000
Supplies Expense	59,825
Miscellaneous Expense	12,400
Depreciation Expense	20,500
Total Expenses		804,125
Profit for 2018		$ 357,875

A balance is absolutely necessary to arrive at a price for the business. Without the values of the assets and liabilities of the business, no valuation of the net worth can be done.