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

The Oceanside Inn began operating on January 1, 2003. On December 31, 2004, it reached the end of its second fiscal year. With a good reputation, a competent staff, and fairly good occupancy, Oceanside had done well financially during both years. Innkeepers Bob Holmes and George Nichols, who managed the inn, were completely dedicated to providing the best service possible to their guests, but they were 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, in turn, requested Oceanside's financial statements. The statements were presented in the format shown in Exhibit 1. Upon viewing the statements, 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, and other similar matters.

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), they uncovered the following information:

  1. The inventory of supplies should have been $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 Expenses.
  3. The land, buildings and equipment had been purchased in January 2003 at a cost of $60,000. The buildings and equipment had an estimated useful life of 20 years. Salvage value was estimated to be $8,000.
  4. Unpaid salaries at December 31, 2004 amounted to $4,000.
  5. Unearned revenue from customer deposits at December 31, 2004 amounted to $4,000. This had been credited to Revenue.


  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.