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 of its first year of operations, the corporation entered into the following transactions.

Dec.	1		Issued to John and Patty Driver 24,000 shares of capital stock in exchange for a total of $240,000 cash.
Dec.	1		Purchased for $268,800 all of the equipment formerly owned by Rent-It. Paid $140,000 cash and issued a 1-year note payable for $128,800. The note, plus all 12 months of accrued interest, are due November 30, Year 2.
Dec.	1		Paid $11,400 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., $1,700. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)
Dec.	8		Received $8,700 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.)
Dec.	12		Paid salaries of $4,800 for the first two weeks in December.
Dec.	15		Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,500, of which $12,200 was received in cash.
Dec.	17		Purchased on account from Earth Movers, Inc., $700 in parts needed to perform basic maintenance on a rental tractor. Payment is due in 10 days.
Dec.	23		Collected $2,800 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, $4,800.
Dec.	27		Paid the account payable to Earth Movers, Inc., $700.
Dec.	28		Declared a dividend of 10 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 $23,000 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 $9,000. 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, $690. Payment is due in 30 days.
Dec.	31		Equipment rental fees earned during the second half of December amounted to $20,700, of which $15,900 was received in cash.

Data for Adjusting Entries in Year 1

1. The advance payment of rent on December 1 covered a period of three months.

2. The annual interest rate on the note payable to Rent-It is 6 percent.

3. The rental equipment is being depreciated by the straight-line method over a period of eight years. Any salvage value at the end of its useful life is expected to be negligible and immaterial.

4. Office supplies on hand at December 31 are estimated at $650.

5. During December, the company earned $4,200 of the rental fees paid in advance by McNamer Construction Company on December 8.

6. As of December 31, six days’ rent on the backhoe rented to Mission Landscaping on December 26 has been earned.

7. Salaries earned by employees since the last payroll date (December 26) amounted to $1,700 at month-end.

8. 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.

Answer 1

Dec.1	Cash A/c	Dr.	$	240,000
	To Capital Stock A/c	Cr.	$	240,000
	(Being 24,000 shares issued to John and Patty Driver for cash)
Dec.1	Rental Equipment A/c	Dr.	$	268,800
	To Cash A/c	Cr.	$	140,000
	To Notes Payable A/c	Cr.	$	128,800
	(Being Equipment purchased for $ 268,800. $140,000 paid in cash and for Balance $ 128,800, one year, 6% Notes issued )
Dec.1	Prepaid Rent A/c	Dr.	$	11,400
	To Cash A/c	Cr.	$	11,400
	(Being Rent for 3 months paid in Advance)
Dec.4	Office Supplies Asset A/c	Dr.	$	1,700
	Accounts Payables A/c	Cr.	$	1,700
	(Being Office Supplies purchased on credit)
Dec.8	Cash A/c	Dr.	$	8,700
	Unearned Rental Fees A/c	Cr.	$	8,700
	(Being Advance payment on Equipment rental received)
Dec.12	Salaries Expenses A/c	Dr.	$	4,800
	Cash A/c	Cr.	$	4,800
	(Being Salary paid)
Dec.15	Cash A/c	Dr.	$	12,200
	Accounts Receivable A/c	Dr.	$	6,300
	Rental Fees Earned A/c	Cr.	$	18,500
	(Being Rental fees earned $ 18,500. Cash $ 12,200, Credit $ 6,300)
Dec.17	Maintenance Expense A/c	Dr.	$	700
	Accounts payable A/c	Cr.	$	700
	(Being Maintenance parts purchased on credit)
Dec.23	Cash A/c	Dr.	$	2,800
	Accounts Receivable A/c	Dr.	$	2,800
	(Being $ 2,800 received from Accounts Receivable)
Dec.26	Renting a backhoe don’t require any Journal entry on this day
Dec.26	Salaries Expenses A/c	Dr.	$	4,800
	Cash A/c	Cr.	$	4,800
	(Being Salary paid)
Dec.27	Accounts payable A/c	Dr.	$	700
	Cash A/c	Cr.	$	700
	(Being $ 700 paid to Earth Movers Inc.)
Dec.28	Dividends A/c	Dr.	$	2,400
	Dividends Payable A/c	Cr.	$	2,400
	(Being Dividend Declared 24,000 x $ 0.10)
Dec.29	Does not require a Journal Entry
Dec.29	Unexpired Insurance A/c	Dr.	$	9,000
	Cash A/c	Cr.	$	9,000
	(Being Insurance purchased, valid from next year)
Dec.31	Utilities Expense A/c	Dr.	$	690
	Accounts Payable A/c	Cr.	$	690
	(Being $ 700 paid to Earth Movers Inc.)
Dec.31	Cash A/c	Dr.	$	15,900
	Accounts Receivable A/c	Dr.	$	4,800
	Rental Fees Earned A/c	Cr.	$	20,700
	(Being Rental fees earned $ 20,700. Cash $ 15,900, Credit $ 4,800)
Closing Entries
Dec.31	Rent Expense A/c	Dr.	$	3,800
	Prepaid Rent A/c	Cr.	$	3,800
	(Being Rent Expense for the month of December is recognized)
Dec.31	Interest Expense A/c	Dr.	$	644
	Interest Payable A/c	Cr.	$	644
	(Being Interest accrued on Notes Payable for 1 month @ 6% is recognized)
Dec.31	Depreciation Expense A/c	Dr.	$	2,800
	Accumulated Depreciation : Rental Equipment A/c	Cr.	$	2,800
	(Being depreciation for 1 month recorded. $2,68,800 /8 x 1/12)
Dec.31	Office Supplies Expense A/c	Dr.	$	1,050
	Office Supplies Asset A/c	Cr.	$	1,050
	(Being Office Supplies Consumed recorded. $1,700 - $ 650)
Dec.31	Unearned Rental Fees A/c	Dr.	$	4,200
	Rental Fees Earned A/c	Cr.	$	4,200
	(Being Rental fees earned recognized)
Dec.31	Accounts Receivable A/c	Dr.	$	1,800
	Rental Fees Earned A/c	Cr.	$	1,800
	(Being Rental fees earned recognized)
Dec.31	Salaries Expense A/c	Dr.	$	1,700
	Salaries Payable A/c	Cr.	$	1,700
	(Being unpaid salaries recognzed)
Dec.31	Income Taxes A/c	Dr.	$	9,686
	Income Taxes Payable A/c	Cr.	$	9,686
	(Being Income Taxes Payable)

Working Note : Calculation of Income Taxes Payable

Statement of Earnings
Revenue			45,200
Expenses			20984
Depreciation Expense A/c	2800
Interest Expense A/c	644
Maintenance Expense A/c	700
Office Supplies Expense A/c	1050
Rent Expense A/c	3800
Salaries Expense A/c	1700
Salaries Expenses A/c	9600
Utilities Expense A/c	690
Profit before Tax			24,216
Tax @ 40 %			9686