Completing Financial Statements, Computing Ratios, Comparing Accrual versus Cash Income, and

Evaluating the Company’s Cash Needs

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, the state government, 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 2014, 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 $376.71 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, 2014, Mountain Home Health declared a dividend of $10,000, payable on January 15, 2015. The firm
makes annual mortgage payments of principal and interest each June 30. The interest rate on the mortgage is
6%.

The following unadjusted trial balance is available for Mountain Home Health on December 31, 2014:
Mountain Home Health Inc.
Unadjusted Trial Balance
December 31, 2014
Debit Credit
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
 Totals $1,041,900 $1,041,900
Required:
1. Set up T accounts for each of the accounts listed on the trial balance. Based on the information
provided, set up any other T accounts that will be needed to prepare adjusting entries.

2. Post the year-end adjusting entries directly to the T accounts but do not bother to put the entries in
journal format first.

3. Pass all necessary journal entries for adjustment.

4. Prepare an adjusted trial balance in six column format.

5. Prepare an income statement and a statement of retained earnings for Mountain Home Health for the
year ended December 31, 2019.

6. Prepare a balance sheet for Mountain Home Health as of December 31, 2019.

7. Compute the following as of December 31, 2019: (a) working capital and (b) current ratio

8. Which adjusting entries could cause a difference between cash- and accrual-based incomes?

9. 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.