Question

On December 1, Year 1, John and Patty Driver formed a corporation called Susquehanna Equipment Rentals. The new corporation was able to begin operations immediately by purchasing the assets and taking over the location of Rent-It, an equipment rental company that was going out of business. The newly formed company uses the following accounts. Cash Capital Stock Accounts Receivable Retained Earnings Prepaid Rent Dividends Unexpired Insurance Income Summary Office Supplies Rental Fees Earned Rental Equipment Salaries Expense Accumulated Depreciation: Rental Equipment Maintenance Expense Notes Payable Utilities Expense Accounts Payable Rent Expense Interest Payable Office Supplies Expense Salaries Payable Depreciation Expense Dividends Payable Interest Expense Unearned Rental Fees Income Taxes Expense Income Taxes Payable The corporation performs adjusting entries monthly. Closing entries are performed annually on December 31. During December, the corporation entered into the following transactions. Dec. 1 Issued to John and Patty Driver 20,000 shares of capital stock in exchange for a total of $240,000 cash. Dec. 1 Purchased for $288,000 all of the equipment formerly owned by Rent-It. Paid $168,000 cash and issued a 1-year note payable for $120,000. The note, plus all 12 months of accrued interest, are due November 30, Year 2. Dec. 1 Paid $14,400 to Shapiro Realty as three months’ advance rent on the rental yard and office formerly occupied by Rent-It. Dec. 4 Purchased office supplies on account from Modern Office Co., $1,200. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.) Dec. 8 Received $9,600 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.) Dec. 12 Paid salaries for the first two weeks in December, $6,240. Dec. 15 Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $21,600, of which $14,400 was received in cash. Dec. 17 Purchased on account from Earth Movers, Inc., $720 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 10 days. Dec. 23 Collected $2,400 of the accounts receivable recorded on December 15. Dec. 26 Rented a backhoe to Mission Landscaping at a price of $300 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two or three weeks. Dec. 26 Paid biweekly salaries, $6,240. Dec. 27 Paid the account payable to Earth Movers, Inc., $720. Dec. 28 Declared a dividend of 12 cents per share, payable on January 15, Year 2. Dec. 29 Susquehanna Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co-defendant in a $30,000 lawsuit filed on behalf of Kevin Davenport. Mission Landscaping had left the rented backhoe in a fenced construction site owned by Collier Construction. After working hours on December 26, Davenport had climbed the fence to play on parked construction equipment. While playing on the backhoe, he fell and broke his arm. The extent of the company’s legal and financial responsibility for this accident, if any, cannot be determined at this time. (Note: This event does not require a journal entry at this time, but may require disclosure in notes accompanying the statements.) Dec. 29 Purchased a 12-month public liability insurance policy for $11,520. This policy protects the company against liability for injuries and property damage caused by its equipment. However, the policy goes into effect on January 1, Year 2, and affords no coverage for the injuries sustained by Kevin Davenport on December 26. Dec. 31 Received a bill from Universal Utilities for the month of December, $840. Payment is due in 30 days. Dec. 31 Equipment rental fees earned during the second half of December amounted to $24,000, of which $18,720 was received in cash. Data for Adjusting Entries The advance payment of rent on December 1 covered a period of three months. The annual interest rate on the note payable to Rent-It is 6 percent. The rental equipment is being depreciated by the straight-line method over a period of eight years. Office supplies on hand at December 31 are estimated at $720. During December, the company earned $4,440 of the rental fees paid in advance by McNamer Construction Company on December 8. As of December 31, six days’ rent on the backhoe rented to Mission Landscaping on December 26 has been earned. Salaries earned by employees since the last payroll date (December 26) amounted to $1,680 at month-end. It is estimated that the company is subject to a combined federal and state income tax rate of 40 percent of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in Year 2.

Prepare an after-closing trial balance as of December 31.

Answer 1

General Journal December Daily Transactions Dec $ 240,000 1 Cash Capital Stock Owner invested cash in the business. $ 240,000 1 Rental Equipment $ 288,000 Cash $ $ 168,000 120,000 Notes Payable Purchased equipment from Rent-it. Note payable is due in one year. 14,400 1 Prepaid Rent Cash $ 14,400 Paid three months' rent in advance to Shapiro Realty. 1,200 4 Office Supplies Accounts Payable $ 1,200 Purchased supplies on account; payment due in 30 days. 8 Cash 9,600 Unearned Rental Fees $ 9,600 Received advance payment for equipment rental by McNamer Construction Company. 6,240 12 Salaries Expense Cash $ 6,240 Paid salaries for first two weeks in December. 15 Cash Accounts Receivable Rental Fees Earned 14,400 7,200 $ 21,600

720 17 Maintenance Expense Accounts Payable $ 720 To record purchase of repair parts on account from Earth Movers, Inc.; payment due in 10 days. 23 Cash 2,400 Accounts Receivable $ 2,400 Collection of an accounts receivable. 26(No entry required to record rental of backhoe.) Dec 6,240 26 Salaries Expense Cash Paid biweekly payroll. 6,240 720 27 Accounts Payable Cash $ 720 Paid account payable to Earth Movers, Inc. 28 Dividends 2,400 Dividends Payable $ 2,400 Declared a dividend of 10 cents per share payable on January 1 29 (No journal entry required to record lawsuit.) 11,520 29 Unexpired Insurance Cash $ 11,520 Purchased 12-month liability policy, effective

$ 840 31 Utilities Expense Accounts Payable 840 Utilities for December; payment due in 30 days. 31 Cash Accounts Receivable Rental Fees Earned $ $ 18,720 5,280 24,000 To record rental fees earned in the second half of December. General Journal (Adjusting Entries) Dec $ 4,800 31 Rent Expense Prepaid Rent 4,800 To recognize rent expense (14400*1/3) 600 31 Interest Expense Interest Payable 600 Interest on note payable to Rent-It ($120,000 x 6% x 1/12). 31 Depreciation Expense $ 3,000 Accumulated Depreciation: Rental Equip. 3,000 ($288,000 + 8 years x 1/12) 480 31 Office Supplies Expense Office Supplies 480 1200-720) 4,440 31 Unearned Rental Fees Rental Fees Earned $ 4,440 To record portion of advance payment by McNamer Construction Co. earned during December.

$ 1,800 31 Accounts Receivable Rental Fees Earned $ 1,800 To record fees earned from Mission Landscaping on backhoe rental (6 days x $300 per day). $ 1,680 31 Salaries Expense Salaries Payable $ 1,680 To record accrued salaries payable at month-end. 1 $ 10,896 3 1 Income Taxes Expense Income Taxes Payable $ 10,896 closing entries $ 51,840 31 Service revenue Income summary $ 51,840 $ 35,496 $ $ $ 31 Income summary Salaries Expense Maintenance Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense Interest Expense Income tax exp. 14,160 720 840 4,800 480 3,000 600 10,896 $ $ $ $ $ 16,344 31 Income summary Retained earnings $ 16,344 2,400 31 Retained earnings Dividends $ 2,400

Explanation Cash Debit 240,000 Date 1 Credit 1 11 1 168,000 14,400 9,600 Blo Balance 240,000 72,000 57,600 67,200 60,960 75,360 77,760 71,5201 70,800 6,240 14,400 2,400 6,240 720 $ 11,5201 59,280 18,720 78,000 Accounts Receivable Date Explanation Debit Credit Balance 15 7,200 1 2,400 7,200 4,800 10,080 11,880 5,280 1,800 Prepaid Rent Debit Date Explanation Credit Balance Dec 14,400 14,400 4,800 9,600 Unexpired Insurance Date Explanation Debit Credit Balance Dec 29 11,520 11,520

Office Supplies Date Explanation Credit Balance Debit 1,200 Dec 4 31] 1,200 720 $ 480 Rental Equipment Date Explanation Credit Debit 288,000 Balance 288,000 Dec Accumulated Depreciation: Rental Equipment Date Explanation Debit Credit 3,000 Balance 3,000 Dec 31 Date Notes Payable Debit Credit 120,000 Balance 120,000 Dec 1 Accounts Payable Debit Credit Date Explanation Balance Dec 1,2001 1,200 $ 720 AN 1,920 1,200 $ 720 $ 840 2,040

Date Explanation Interest Payable Debit Credit $ 600 Balance 600 Dec 31 Salaries Payable Debit Credit Date Explanation Balance Dec 1,680 1,680 Date Explanation Dividends Payable Debit Credit 2,400 Balance 2,400 128 Unearned Rental Fees Debit Credit Date Explanation Balance Ded 8 9,600 131 4,440 9,600 5,160 Date Explanation Income Taxes Payable Debit Credit 10,896 Balance 10,896 Dec 31 Capital Stock Debit Date Explanation Credit Balance 240,000 240,000

Date Maintenance Expense Debit 720 Credit Explanation 17 30 to close Balance 720 Dec $ 720 Date Utilities Expense Debit 840 Credit Explanation 31 31 to close Balance 840 Dec $ 840 Rent Expense Debit Date Explanation Credit Balance Dec 4,800 4,800 1 31 to close 4,800 Office Supplies Expense Date Debit Credit Balance Dec Explanation 31 31 to close 480 480 $ 480 a. & d. Depreciation Expense Credit Date Fynlanat Explanation 31 Debit 3,000 Balance 3,000 Dec 31 to close 3.000

Interest Expense Date Explanation Debit Credit Balance 600 Dec 31 600 31 to close $ 600 Income Taxes Expense Date Explanation Debit Credit Balance Dec 131 10,896 10,896 10,896 Dividends Debit Date | Credit Explanation 281 31 to close Balance 2,400 Dec 2,400 2,400|| Rental Fees Earned Explanation Debit Date 1 Credit 21,600 Balance 21,600 Dec 151 24,000 45,600 4,440 1,800 50,040 51,840 1 31 to close 51,840

Salaries Expense Debit Date Explanation Credit Balance Dec 12 6,240| 6,240 6,2400 1,680 31 31 to close 12,480 14,160 14,1600 Income statement Revenues $ 51,840 Salaries Expense Maintenance Expense Utilities Expense $ $ (14,160) (720) (840) Rent Expense Office Supplies Expense Depreciation Expense Interest Expense $ $ $ (4,800) (480) (3,000) (600) Net Income 27,240 S Tax @40% Net profit 10,896 16,344 $

Balance sheet current assets Cash Accounts receivable Prepaid rent Unexpired insurance Office supplies Total current assets $ $ $ $ $ 78,000 11,880 9,600 11,520 720 $ 111,720 Rental equipment Less:accumulated dep Total assets $ $ 288,000 (3,000) $ $ 285,000 396,720 $ $ Current liabilties Notes Payable Accounts Payable Interest Payable Salaries Payable Dividends Payable Unearned Rental Fees Income Taxes Payable Total current liabilties 120,000 2,040 600 1,680 2,400 5,160 10,896 $ $ $ 142,776 Stockholder's equity Capital Stock Retained earnings Total Stockholder's equity Total liabilities & equity $ $ 240,000 13,944 $ $ 253,944 396,720

Statement of retained earnings Opening balance Add:net income 16,344 Less:dividends $ (2,400) Closing balance 13,944 HIS Post closing trial balance items debit credit Cash 78,000 Accounts receivable 11,880 Prepaid rent $ 9,600 Unexpired insurance $ 11,520 Office supplies $ 720 Rental equipment $ 288,000 Accumulated dep $ 3,000 Notes Payable $ 120,000 Accounts Payable $ 2,040 Interest Payable $ 600 Salaries Payable 1,680 Dividends Payable Ś 2,400 Unearned Rental Fees $ 5,160 Income Taxes Payable $ 10,896 Capital Stock $ 240,000 Retained earnings $ 13,944 totals $ 399,720 | $ 399,720 |