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 26,000 shares of capital stock in exchange for a total of $260,000 cash.
Dec.	1		Purchased for $268,800 all of the equipment formerly owned by Rent-It. Paid $137,000 cash and issued a 1-year note payable for $131,800. The note, plus all 12 months of accrued interest, are due November 30, Year 2.
Dec.	1		Paid $9,900 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., $1,000. 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 for the first two weeks in December, $4,900.
Dec.	15		Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,600, of which $12,400 was received in cash.
Dec.	17		Purchased on account from Earth Movers, Inc., $800 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 $340 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, $4,900.
Dec.	27		Paid the account payable to Earth Movers, Inc., $800.
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 $24,000 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 $9,240. 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, $670. Payment is due in 30 days.
Dec.	31		Equipment rental fees earned during the second half of December amounted to $20,400, of which $16,200 was received in cash.

Data for Adjusting Entries

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.

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

5. During December, the company earned $4,700 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 $1,300 at month-end.

8. 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.

Post the entries into the following ledger accounts. (Enter the transaction in chronological order for each of the Ledger accounts. Round your final answers to the nearest whole dollar.)

Answer 1

Prepare journal entries as follows:

Date	Account Titles	Debit	Credit
Dec. 01	Cash	$260,000
	Capital Stock		$260,000
Dec. 01	Equipment	$268,000
	Cash		$137,000
	Note payable		$131,000
Dec. 01	Prepaid Rent	$9,900
	Cash		$9,900
Dec. 04	Office Supplies	$1,000
	Accounts payable		$1,000
Dec. 08	Cash	$8,700
	Unearned Rental fees		$8,700
Dec. 12	Salaries Expense	$4,900
	Cash		$4,900
Dec. 15	Cash	$12,400
	Accounts Receivable	$6,200
	Rental fees earned		$18,600
Dec. 17	Maintenance Expense	$800
	Accounts payable		$800
Dec. 23	Cash	$2,100
	Accounts Receivable		$2,100
Dec. 26	No entry
Dec. 27	Salaries Expense	$4,900
	Cash		$4,900
Dec. 28	Dividends	$2,600
	Dividends payable		$2,600
	[26,000 shares × $0.10]
Dec. 29	No entry
Dec. 29	Prepaid Insurance	$9,240
	Cash		$9,240
Dec. 31	Utilities Expense	$670
	Accounts payable		$670
Dec. 31	Cash	$16,200
	Accounts Receivable	$4,200
	Rental fees earned		$20,400

_______________________________________________________

Prepare Adjusting entries as follows:

Trn.	Account Titles	Debit	Credit
a)	Rent Expense	$3,300
	Prepaid Rent		$3,300
	[$9900/3]
b)	Interest Expense	$659
	Interest payable		$659
	[$131,800 × 6% × 1/12]
c)	Depreciatio expense	$2,800
	Accumulated depreciation		$2,800
	[$268800/8 years] × 1/12
d)	Office Supplies Expense	$350
	Office Supplies		$350
	[$1000 - $650]
e)	Unearned Rental fees	$4,700
	Rental fees earned		$4,700
f)	Accounts Receivable	$2,040
	Rental fees earned		$2,040
	[$340 × 6 days]
g)	Salaries Expense	$1,300
	Salaries payable		$1,300
h)	Income tax expense	$7818
	Income tax payable		$7818

_________________________________________

Prepare Income Statement: