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

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

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

c. The rental equipment is being depreciated by the straight-line method over a period of eight years.

d. Office supplies on hand at December 31 are estimated at $720.

e. During December, the company earned $4,440 of the rental fees paid in advance by McNamer Construction Company on December 8.

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

g. Salaries earned by employees since the last payroll date (December 26) amounted to $1,680 at month-end.

h. 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.

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

f. During December, this company’s cash balance has fallen from $240,000 to $78,000. Does it appear headed for insolvency in the near future? Explain your reasoning.

g. Would it be ethical for Patty Driver to maintain the accounting records for this company, or must they be maintained by someone who is independent of the organization?

Answer 1

E

	Trial Balance
Particulars	DR $	CR$
Cash	78000
Accounts Receivable	11880
Prepaid Rent	9600
Unexpired Insurance	11520
Office Supplies	720
Rental Equipment	285000
Notes Payable		120000
Accounts Payable		2040
Interest Payable		600
Salaries Payable		1680
Dividends Payable		28800
Unearned Rental Fees		5160
Income Taxes Payable		12960
Capital Stock		240000
Dividends	28800
Rental Fees Earned		51840
Salaries Expense	14160
Maintenance Expense	720
Utilities Expense	840
Rent Expense	4800
Office Supplies Expense	480
Depreciation Expense	3000
Interest Expense	600
Income Taxes Expense	12960
TOTAL	463080	463080

F.  

NO. it does not appear headed for insolvency. the company have taken equipment on rent.therefore the huge cash is spent on it. hence cash is reduced from $240000 to$78000.

G.

Yes i is ethical to maintain accounting records.