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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...

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


Expenses paid:

Rent for Office Space


Utility Expense


Telephone Expense


Salaries Expense


Supplies Expense


Miscellaneous Expenses


Total Expenses


Profit for 2015


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).


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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