Mini Case 1: Art Specialist Inc.

Jefferson Jerome is interested in purchasing “Art Specialists Inc.”, an auction house. The company receives the right to sell art but not to purchase the art themselves for a 5% commission. Art Specialists rents office space and Chelsea and holds its auctions at local hotels.

Art Specialist Inc.
Unadjusted Trial Balance
December 31, 2009

Cash $ 65,000.00
Accounts receivable $ 36,000.00
Supplies $ 8,000.00
Equipment $ 53,000.00
Accumulated Depreciation $ 14,500.00
Accounts payable $ 5,600.00
Dividends $ 50,000.00
Capital stock $ 25,000.00
Retained earnings $ 84,900.00
Commission income $ 250,000.00
Rent Expense $ 20,000.00
Wages Expense $ 70,000.00
Auction Expenses $ 56,000.00
Depreciation Expenses $ 7,000.00
Membership Expenses $ 6,000.00
Supplies Expense $ 9,000.00
TOTAL $ 380,000.00 $ 380,000.00

As Jefferson’s accountant, you have received the trial balance above as well as the general ledger. The review has found the following errors:

• Year end bank reconciliation showed that the balance should be $40,000. An customer should have been billed for $25,000 but it was recorded as a cash payment of the commission income.
• Membership expenses are not related to the business and should be shown as a dividend to shareholder.
• Depreciation expense should be $3,500 for the year.
• Supplies expenses failed to record $2,000 in packing supplies used during the year.
• Accounts receivables that have not been billed $10,000.

Required:
1. Record the correcting entry.
2. Prepare financial statements
3. Current owners want $200,000 for the business. Jefferson does not want to pay more than Net Worth x 1.5. Should he buy?