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 $230,400 all of the equipment formerly owned by Rent-It. Paid $136,000 cash and issued a 1-year note payable for $94,400. 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., $2,000. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.) Dec. 8 Received $8,200 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, $4,800. Dec. 15 Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,500, of which $12,400 was received in cash. Dec. 17 Purchased on account from Earth Movers, Inc., $600 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 10 days. Dec. 23 Collected $2,000 of the accounts receivable recorded on December 15. Dec. 26 Rented a backhoe to Mission Landscaping at a price of $270 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., $600. 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 $8,640. 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, $630. Payment is due in 30 days. Dec. 31 Equipment rental fees earned during the second half of December amounted to $20,300, 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 $650. During December, the company earned $4,500 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 $1,700 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	$ 260,000
Dec 1	Capital Stock		$ 260,000
Dec 1	Rental Equipment	$ 230,400
Dec 1	Cash		$ 136,000
Dec 1	Note Payable		$   94,400
Dec 1	Prepaid Rent	$     9,900
Dec 1	Cash		$     9,900
Dec 4	Office Supplies	$     2,000
Dec 4	Accounts Payable		$     2,000
Dec 8	Cash	$     8,200
Dec 8	Unearned Rental Fee		$     8,200
Dec 12	Salaries Expense	$     4,800
Dec 12	Cash		$     4,800
Dec 15	Cash	$   12,400
Dec 15	Accounts Receivable	$     6,100
Dec 15	Rental Fee Earned		$   18,500
Dec 17	Maintenance Expense	$         600
Dec 17	Accounts Payable		$         600
Dec 23	Cash	$     2,000
Dec 23	Accounts Receivable		$     2,000
Dec 26	Salaries Expense	$     4,800
Dec 26	Cash		$     4,800
Dec 27	Accounts Payable	$         600
Dec 27	Cash		$         600
Dec 28	Dividends	$     2,600		26000*0.10
Dec 28	Dividend Payable		$     2,600
Dec 29	Unexpired Insurance	$     8,640
Dec 29	Cash		$     8,640
Dec 31	Utilities Expense	$         630
Dec 31	Accounts Payable		$         630
Dec 31	Cash	$   16,100
Dec 31	Accounts Receivable	$     4,200
Dec 31	Rental Fee Earned		$   20,300
Adjusting Entries:
Date	Account	Debit	Credit
a	Rent Expense	$     3,300		9900/3*1
a	Prepaid Rent		$     3,300
b	Interest Expense	$         472		94400*6%*1/12
b	Interest Payable		$         472
c	Depreciation Expense	$     2,400		230400/8*1/12
c	Accumulated Depreciation		$     2,400
d	Office Supplies Expense	$     1,350		2000-650
d	Office Supplies		$     1,350
e	Unearned Rental Fee	$     4,500
e	Rental Fee Earned		$     4,500
f	Accounts Receivable	$     1,620		270*6 days
f	Rental Fee Earned		$     1,620
g	Salaries Expense	$     1,700
g	Salaries Payable		$     1,700
h	Income Tax Expense	$   10,896
h	Income Tax Payable		$   10,896
Closing Entries:
Dec 31	Rent revenue	$   44,920
	Income Summary		$   44,920
	(To close Revenue Accounts)
Dec 31	Income Summary	$   27,512
	Utilities Expense		$         630
	Maintenance Expense		$         600
	Salaries Expense		$   11,300
	Office Supplies Expense		$     1,350
	Rent Expense		$     3,300
	Depreciation Expense		$     2,400
	Interest Expense		$         472
	Income Tax Expense		$     7,460
	(to close Expense account)
Dec 31	Income Summary	$   17,408
	Retained Earning		$   17,408
	(to close income summayr account)
Dec 31	Retained Earning	$     2,600
	Dividends		$     2,600
	(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	$     133,960				$       133,960				$133,960
Accounts Receivable	$         8,300		$           1,620		$           9,920				$    9,920
Office supplies	$         2,000			$           1,350	$              650				$        650
Prepaid Rent	$         9,900			$           3,300	$           6,600				$    6,600
Unexpired Insurance	$         8,640				$           8,640				$    8,640
Rental Equipment	$     230,400				$       230,400				$230,400
Accumulated Depreciation				$           2,400		$           2,400				$    2,400
Accounts Payable		$           2,630				$           2,630				$    2,630
Salaries Payable				$           1,700		$           1,700				$    1,700
Income Tax Payable				$           7,461		$           7,461				$    7,461
Note Payable		$         94,400				$         94,400				$ 94,400
Unearned Rental Fee		$           8,200	$           4,500			$           3,700				$    3,700
Interest Payable				$              472		$              472				$        472
Dividend Payable		$           2,600				$           2,600				$    2,600
Capital Stock		$       260,000				$       260,000				$260,000
Retained Earnings						$                 -
Dividends	$         2,600				$           2,600	$                 -			$    2,600
Rental Fee Earned		$         38,800		$           6,120		$         44,920		$   44,920
Utilities Expense	$            630				$              630		$         630
Maintenance Expense	$            600				$              600		$         600
Salaries Expense	$         9,600		$           1,700		$         11,300		$   11,300
Office Supplies Expense			$           1,350		$           1,350		$     1,350
Income Tax Expenses			$           7,461		$           7,461		$     7,461
Rent Expense			$           3,300		$           3,300		$     3,300
Depreciation Expense			$           2,400		$           2,400		$     2,400
Interest Expense			$              472		$              472		$         472
Total	$     406,630	$       406,630	$         22,803	$         22,803	$       420,283	$       420,283	$   27,513	$   44,920	$392,770	$375,363
Net Income							$   17,407			$ 17,407
Grand Total									$392,770	$392,770
Income Statement:
Rent revenue		$         44,920
Less operating expenses:
Utilities Expense	$            630
Maintenance Expense	$            600
Salaries Expense	$       11,300
Office Supplies Expense	$         1,350
Rent Expense	$         3,300
Depreciation Expense	$         2,400
Total Operating Expenses:		$         19,580
Net Operating Income		$         25,340
Less: Interest Expense		$              472
Income before taxes		$         24,868
Less income taxes 30%		$           7,460
Net income		$         17,408
Statement of Retained Earning:
Begingin Retained Earning		$                 -
Add: Net Income		$         17,408
Less: Dividends		$           2,600
Ending Retained Earning		$         14,808
Balance Sheet:
Cash		$       133,960
Accounts receivable		$           9,920
Office Supplies		$              650
Prepaid Rent		$           6,600
Unexpired Insurance		$           8,640
Total Current assets		$       159,770
Rental Equipment	$     230,400
Accumulated Depreciation	$        -2,400	$       228,000
Total Assets		$       387,770
Liabilities:
Accounts Payable		$           2,630
Salaries Payable		$           1,700
Income Tax Payable		$           7,460
Note Payable		$         94,400
Unearned Rental Fee		$           3,700
Interest Payable		$              472
Dividend Payable		$           2,600
Current Liabilities		$       112,962
Total liabilities		$       112,962
Stockholders’equity:
Capital stock (26,000 shares outstanding)		$       260,000
Retained earnings		$         14,808
Total stockholders’ equity		$       274,808
Total liabilities and stockholders’ equity		$       387,770