Mountain Home Health Inc. provides home nursing services in the Great Smoky Mountains of Tennessee. When contacted by a client or referred by a physician, nurses visit the patient and discuss needed services with the physician. Mountain Home Health earns revenue from patient services. Most of the revenue comes from billing insurance companies, the state of Tennessee, or the Medicare program. Amounts billed are recorded in the Billings Receivable account. Insurance companies, states, and the federal government do not fully fund all procedures. For example, the state of Tennessee pays an average 78% of billed amounts. Mountain Home Health has already removed the uncollectible amounts from the Billings Receivable account and reports it and Medical Services Revenue at the net amount. Services provided but not yet recorded totaled $16,000, net of allowances for uncollectible amounts. The firm earns a minor portion of its total revenue directly from patients in the form of cash. Employee salaries, medical supplies, depreciation, and gasoline are the major expenses. Employees are paid every Friday for work performed during the Saturday-to-Friday pay period. Salaries amount to $800 per day. In 2008, December 31 falls on a Wednesday. Medical supplies (average use of $1,500 per week) are purchased periodically to support healthcare coverage. The inventory of supplies on hand on December 31 amounted to $8,653.
The firm owns five automobiles (all purchased at the same time) that average 50,000 miles per year and are replaced every three years. They typically have no residual value. The building has an expected life of 20 years with no residual value. Straight-line depreciation is used on all of the firm’s assets. Gasoline costs, which are a cash expenditure, average $375 per day. The firm purchases a three-year extended warranty contract to cover maintenance costs. The contract costs $9,000. (Assume equal use each year.) On December 29, 2008, Mountain Home Health declared a dividend of $10,000, payable on January 15, 2009. The firm makes annual mortgage payments of principal and interest each June 30. The interest rate on the mortgage is 6%. The following account balances are available for Mountain Home Health on December 31, 2008:
Cash ……………………………….………… $ 77,400
Billings Receivable (net) ……………..……… 151,000
Medical Supplies ……………………..……… 73,000
Extended Warranty …………………………… 3,000
Automobiles ………………………………..…. 90,000
Accumulated Depreciation—Automobiles …… 60,000
Building ………………………………………. 200,000
Accumulated Depreciation—Building ……….. 50,000
Accounts Payable …………………………….. $ 22,000
Dividend Payable …………………………….. 10,000
Mortgage Payable ……………………………. 100,000
Capital Stock ………………………………….100,000
Additional Paid-In Capital …………………… 50,000
Retained Earnings …………………………… 99,900
Medical Services Revenue …………………..550,000
Salary and Wages Expense ………………….288,000
Gasoline Expense ……………………………137,500
Utilities Expense ………………………….… 12,000
Dividends …………………………………… 10,000
Required
1. Identify and analyze the necessary adjustments on December 31, 2008.
2. Prepare a statement of income and a statement of retained earnings for Mountain Home Health for the year ended December 31, 2008.
3. Prepare a balance sheet for Mountain Home Health as of December 31, 2008.
4. Compute the following as of December 31, 2008: (a) working capital and (b) current ratio.
5. Which of the adjustments could cause a difference between cash- and accrual-based income?
6. Mary Francis, controller of Mountain Home, became concerned about the company’s cash flow after talking to a local bank loan officer. The firm tries to maintain a seven-week supply of cash to meet the demands of payroll, medical supply purchases, and gasoline. Determine the amount of cash Mountain Home needs to meet the seven-week supply.
