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.

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.

Post the entries into the following ledger accounts.

Complete the 10 column worksheet for the year ended December 31.

Answer 1

Ans- Susquehanna Equipment Rentals

Comprehensive Problem

Susquehanna Equipment Rentals

General Journal

December 1-31

Date	Accounts Title and Explanations	Debit	Credit
Dec.1	Cash	240,000
	Capital Stock		240,000
	(Issued 20,000shares at par value of $12)
Dec.1	Rental Equipment	288,000
	Cash		168,000
	Notes Payable		120,000
	(Purchased all equipments formerly owned by Rent-it)
Dec.1	Prepaid Rent	14,400
	Cash		14,400
	(Paid three months rent in advance to shapiro)
Dec.4	Office Supplies	1,200
	Accounts Payable		1,200
	(Purchased Office Supplies on account from Modern Office)
Dec.8	Cash	9,600
	Unearned Rental Fees		9.600
	(Received advance payment on equipment rental from McNamer)
Dec.12	Salaries Expense	6,240
	Cash		6,240
	(Paid Salaries for the first two weeks in december)
Dec.15	Cash	14,400
	Accounts Payable	7,200
	Rental Fees Earned		21,600
	(Rental fees earned during the first 15 days of december)
Dec.17	Maintenance Expense	720
	Accounts Payable		720
	(Purchased parts on account from Earth Mover)
Dec.23	Cash	2,400
	Accounts Receivable		2,400
	(Collected Accounts Receivable recorded on December 15)
Dec.26	No Transaction should be recorded because no service was received yet and no cash was received in advance for a service to be rendered
Dec.26	Salaries Expense	6,240
	Cash		6,240
	Paid biweekly salaries to employees)
Dec.27	Accounts Payable	720
	Cash		720
	(Paid the accounts payable to Earth Movers)
Dec.28	Dividends (240,000*12/100)	28,800
	Dividends Payable		28,800
	(Declared dividends of 12 cents per share)
Dec.29	Unexpired Insurance	11,520
	Cash		11,520
	(Purchased a 12 months public liability insurance)
Dec.31	Utilities Expense	840
	Accounts Payable		840
	(Received a bill from Universal Utilities)
Dec.31	Cash	18,720
	Accounts Payable	5,280
	Rental Fees Earned		24,000
	(Rental Fees earned during second half of december)

1-(b) Adjusting Entries

Dec.31	Rent Expense	4,800
	Prepaid Rent		4,800
	(Rent Expense during december)
Dec.31	Interest Expense (120,000*6/100*1/12)	600
	Interest Payable		600
	(Interest Expense occured during december)
Dec.31	Dep.Expense: Rental equipment (288,000/8*1/12)	3,000
	Accumulated Dep.: Rental Equipment		3,000
	Monthly Depreciation on rental equipment)
Dec.31	Office Supplies Expense	720
	Office Supplies		720
	(Estimated Office Supplies used in december)
Dec.31	Unearned Rental Fees	4,440
	Rental Fees Earned		4,440
	(Portion of rental fees received in advance has been earned)
Dec.31	Accounts Receivable(300*6)	1,800
	Rental Fees Earned		1.800
	(Rental fees earned from Mission Landscaping)
Dec.31	Salaries Expense	1,680
	Salaries payable		1.680
	(Salaries owed to employees)
Dec.31	Income Tax Expense(27,000*40%)	10,800
	Income Tax Payable		10,800
	(Estimated Income tax for december)

Closing Entries

Dec.31	Rental Fees Earned	51,840
	Income Summary		51,840
	(To close Rental fees earned)
	Income Summary	35,640
	Salaries Expense		14,160
	Maintenance Expense		720
	Utilities Expense		840
	Rent expense		4,800
	Office Supplies Expense		720
	Deprecition Expense		3,000
	Interest Expense		600
	Income Tax Expense		10,800
	(To close expenses accounts)
	Income Summary	16,200
	Retained Earning		16,200
	(Transferring net income to retained earning)