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Oceanside Nursing Home
Author(s):
Young, David W.
Functional Area(s):
   Financial Accounting
Setting(s):
   Nonprofit
Difficulty Level: Beginner
Pages: 2
Teaching Note: Available. 
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Oceanside Inn
First Page and the Assignment Questions:

Oceanside Nursing Home began operating on January 1, 2003. It is now December 31, 2004, the end of the second fiscal year. With a good reputation, a competent staff, and fairly good patient revenue, Oceanside did well financially during both years. Bob Holmes and George Nichols, who manage the home, are completely dedicated to providing the best care possible to their clients, but they are not the least bit interested in keeping accurate financial records.

Seeing a low cash balance in the check book, Holmes and Nichols asked their local bank for a loan. The bank requested Oceanside's financial statements. The statements were presented in the format shown in Exhibit 1.

Upon viewing the statements provided, the bank officers found them to be much too general. They insisted on additional information before a loan could even be considered-information dealing with depreciation, accruals, inventory counts, etc.

Holmes and Nichols were amazed. They had not anticipated any problems regarding their loan request. After feverishly reviewing their records and supporting statements (with some expert assistance), the following information was discovered:

  1. The inventory of supplies should be $3,000 instead of the $4,000 shown on December 31, 2004.
  2. Prepaid insurance at December 31, 2004 amounted to $2,000. All of the insurance premium had been debited to Other Expense.
  3. The land, buildings, and equipment had been purchased in early January 2003 at a cost of $60,000. The buildings and equipment had an estimated useful life of 20 years. Salvage value is estimated to be $8,000.
  4. Unpaid salaries at December 31, 2004 amounted to $4,000.
  5. Unearned patient revenue at December 31, 2004 amounted to $4,000. This had been credited to Patient Revenue.

Assignment

  1. Set up T accounts and enter beginning balances.
  2. Prepare journal entries for items 1 through 5 above, and post them to the T accounts.
  3. Prepare corrected financial statements, taking the above information into account.