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.

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 21,000 shares of capital stock in exchange for a total of $210,000 cash.
Dec.	1		Purchased for $220,800 all of the equipment formerly owned by Rent-It. Paid $132,000 cash and issued a 1-year note payable for $88,800. The note, plus all 12 months of accrued interest, are due November 30, Year 2.
Dec.	1		Paid $10,500 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., $1,500. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)
Dec.	8		Received $9,000 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, $4,500.
Dec.	15		Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,100, of which $12,800 was received in cash.
Dec.	17		Purchased on account from Earth Movers, Inc., $500 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 10 days.
Dec.	23		Collected $2,100 of the accounts receivable recorded on December 15.
Dec.	26		Rented a backhoe to Mission Landscaping at a price of $330 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, $4,500.
Dec.	27		Paid the account payable to Earth Movers, Inc., $500.
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 $22,000 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 $9,360. 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, $610. Payment is due in 30 days.
Dec.	31		Equipment rental fees earned during the second half of December amounted to $20,000, of which $16,100 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 $630. During December, the company earned $4,200 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 $1,900 at month-end. It is estimated that the company is subject to a combined federal and state income tax rate of 30 percent of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in Year 2. Comprehensive Problem 1 Part 1 1-a. Journalize the December transactions. Do not record adjusting entries at this point. 1-b. Prepare the necessary adjusting entries for December. 1-c. Prepare closing entries and post to ledger accounts.

Answer 1

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Date	Account	Debit	Credit
Dec 1	Cash	$ 210,000
Dec 1	Capital Stock		$ 210,000
Dec 1	Rental Equipment	$ 220,800
Dec 1	Cash		$ 132,000
Dec 1	Note Payable		$   88,800
Dec 1	Prepaid Rent	$   10,500
Dec 1	Cash		$   10,500
Dec 4	Office Supplies	$     1,500
Dec 4	Accounts Payable		$     1,500
Dec 8	Cash	$     9,000
Dec 8	Unearned Rental Fee		$     9,000
Dec 12	Salaries Expense	$     4,500
Dec 12	Cash		$     4,500
Dec 15	Cash	$   12,800
Dec 15	Accounts Receivable	$     5,300
Dec 15	Rental Fee Earned		$   18,100
Dec 17	Maintenance Expense	$         500
Dec 17	Accounts Payable		$         500
Dec 23	Cash	$     2,100
Dec 23	Accounts Receivable		$     2,100
Dec 26	Salaries Expense	$     4,500
Dec 26	Cash		$     4,500
Dec 27	Accounts Payable	$         500
Dec 27	Cash		$         500
Dec 28	Dividends	$     2,100		21000*0.10
Dec 28	Dividend Payable		$     2,100
Dec 29	Unexpired Insurance	$     9,360
Dec 29	Cash		$     9,360
Dec 31	Utilities Expense	$         610
Dec 31	Accounts Payable		$         610
Dec 31	Cash	$   16,100
Dec 31	Accounts Receivable	$     3,900
Dec 31	Rental Fee Earned		$   20,000
Adjusting Entries:
Date	Account	Debit	Credit
a	Rent Expense	$     3,500		105000/3*1
a	Prepaid Rent		$     3,500
b	Interest Expense	$         444		88800*6%*1/12
b	Interest Payable		$         444
c	Depreciation Expense	$     2,300		220800/8*1/12
c	Accumulated Depreciation		$     2,300
d	Office Supplies Expense	$         870		1500-630
d	Office Supplies		$         870
e	Unearned Rental Fee	$     4,200
e	Rental Fee Earned		$     4,200
f	Accounts Receivable	$     1,980		330*6 days
f	Rental Fee Earned		$     1,980
g	Salaries Expense	$     1,900
g	Salaries Payable		$     1,900
h	Income Tax Expense	$   10,896
h	Income Tax Payable		$   10,896
Closing Entries:
Dec 31	Rent revenue	$   44,280
	Income Summary		$   44,280
	(To close Revenue Accounts)
Dec 31	Income Summary	$   29,186
	Utilities Expense		$         610
	Maintenance Expense		$         500
	Salaries Expense		$   10,900
	Office Supplies Expense		$         870
	Rent Expense		$     3,500
	Depreciation Expense		$     2,300
	Interest Expense		$         444
	Income Tax Expense		$   10,062
	(to close Expense account)
Dec 31	Income Summary	$   15,094
	Retained Earning		$   15,094
	(to close income summayr account)
Dec 31	Retained Earning	$     2,100
	Dividends		$     2,100
	(to close Dividends account)

Adjusted Trial Balance
	Unadjusted		Adjustments		Adjusted		Income Statement		Balance Sheet
Account	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit	Debit	Credit
Cash	$       88,640				$         88,640				$ 88,640
Accounts Receivable	$         7,100		$           1,980		$           9,080				$    9,080
Office supplies	$         1,500			$              870	$              630				$        630
Prepaid Rent	$       10,500			$           3,500	$           7,000				$    7,000
Unexpired Insurance	$         9,360				$           9,360				$    9,360
Rental Equipment	$     220,800				$       220,800				$220,800
Accumulated Depreciation				$           2,300		$           2,300				$    2,300
Accounts Payable		$           2,110				$           2,110				$    2,110
Salaries Payable				$           1,900		$           1,900				$    1,900
Income Tax Payable				$         10,062		$         10,062				$ 10,062
Note Payable		$         88,800				$         88,800				$ 88,800
Unearned Rental Fee		$           9,000	$           4,200			$           4,800				$    4,800
Interest Payable				$              444		$              444				$        444
Dividend Payable		$           2,100				$           2,100				$    2,100
Capital Stock		$       210,000				$       210,000				$210,000
Retained Earnings						$                 -
Dividends	$         2,100				$           2,100	$                 -			$    2,100
Rental Fee Earned		$         38,100		$           6,180		$         44,280		$   44,280
Utilities Expense	$            610				$              610		$         610
Maintenance Expense	$            500				$              500		$         500
Salaries Expense	$         9,000		$           1,900		$         10,900		$   10,900
Office Supplies Expense			$              870		$              870		$         870
Income Tax Expenses			$         10,062		$         10,062		$   10,062
Rent Expense			$           3,500		$           3,500		$     3,500
Depreciation Expense			$           2,300		$           2,300		$     2,300
Interest Expense			$              444		$              444		$         444
Total	$     350,110	$       350,110	$         25,256	$         25,256	$       366,796	$       366,796	$   29,186	$   44,280	$337,610	$322,516
Net Income							$   15,094			$ 15,094
Grand Total									$337,610	$337,610
Income Statement:
Rent revenue		$         44,280
Less operating expenses:
Utilities Expense	$            610
Maintenance Expense	$            500
Salaries Expense	$       10,900
Office Supplies Expense	$            870
Rent Expense	$         3,500
Depreciation Expense	$         2,300
Total Operating Expenses:		$         18,680
Net Operating Income		$         25,600
Less: Interest Expense		$              444
Income before taxes		$         25,156
Less income taxes 40%		$         10,062
Net income		$         15,094
Statement of Retained Earning:
Begingin Retained Earning		$                 -
Add: Net Income		$         15,094
Less: Dividends		$           2,100
Ending Retained Earning		$         12,994
Balance Sheet:
Cash		$         88,640
Accounts receivable		$           9,080
Office Supplies		$              630
Prepaid Rent		$           7,000
Unexpired Insurance		$           9,360
Total Current assets		$       114,710
Rental Equipment	$     220,800
Accumulated Depreciation	$        -2,300	$       218,500
Total Assets		$       333,210
Liabilities:
Accounts Payable		$           2,110
Salaries Payable		$           1,900
Income Tax Payable		$         10,062
Note Payable		$         88,800
Unearned Rental Fee		$           4,800
Interest Payable		$              444
Dividend Payable		$           2,100
Current Liabilities		$       110,216
Total liabilities		$       110,216
Stockholders’equity:
Capital stock (21, 000 shares outstanding)		$       210,000
Retained earnings		$         12,994
Total stockholders’ equity		$       222,994
Total liabilities and stockholders’ equity		$       333,210