Question

Below is the data for Troy Equipment Rentals. On December 1, Year 1, Benjamin and Josefa Garcia formed a corporation called Troy Equipment Rentals. The new corporation was able to begin operations immediately by purchasing the assets and taking over an equipment rental company that was going out of business. Troy Equipment 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 recorded the following transactions. Dec. 1 Issued to Benjamin and Josefa 21,000 shares of capital stock in exchange for a total of $210,000 cash. Dec. 1 Purchased for $249,600 all of the equipment formerly owned by Rent-It-All. Paid $134,000 cash and issued a 1-year note payable for $115,600. The note, plus all 12 months of accrued interest, are due November 30, Year 2. Dec. 1 Paid $9,600 to Patel Realty as three months’ advance rent on the rental yard and office formerly occupied by Rent-It-All. Dec. 4 Purchased office supplies on account from Modern Office Co., $1,900. Payment due in 30 days. These supplies are expected to last for several months Dec. 8 Received $8,600 cash as advance payment on equipment rental from LFG Construction Company. Dec. 12 Paid salaries for the first two weeks in December, $5,200. Dec. 15 Excluding the LFG advance, equipment rental fees earned during the first 15 days of December amounted to $18,800, of which $12,600 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 $2,500 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, $5,200. 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 Troy 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: You will need to determine of any entry is required) Dec. 29 Purchased a 12-month public liability insurance policy for $8,880. This policy protects the company against liability for injuries and property damage caused by its equipment. Dec. 31 Received a bill from Universal Utilities for the month of December, $650. Payment is due in 30 days. Dec. 31 Equipment rental fees earned during the second half of December amounted to $20,100, of which $15,700 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-All is 6%. 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 $670. e. During December, the company earned $4,300 of the rental fees paid in advance by LFG Construction Company on December 8. f. As of December 31, six days’ rent on the backhoe rented to Mission Landscaping has been earned. g. Salaries earned by employees since the last payroll date (December 26) amounted to $1,700 at month-end. h. It is estimated that the company is subject to a combined federal and state income tax rate of 40% of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in Year 2. Required: 1. Journalize the December transactions. 2. Create the Trial Balance 3. Create adjusting entries 4. Prepare these three statements: Income Statement, Statement of Retained Earnings and Balance Sheet 5. Prepare an after-closing trial balances as of December 31st. 6. Based on what you see in their statements, if offered the opportunity to purchase stock in this company, would you? Provide three reasons for your decision.

Answer 1

1.

TROY EQUIPMENT RENTALS
General Journal for the month of December , Year 1
Date	Account Title	Debit	Credit
Dec.1	Cash	210000
	Capital Stock		210000
	(Issue of 21,000 shares of capital stock for cash)
Dec.1	Equipment	249600
	Cash		134000
	Note Payable		115600
	(Purchase of equipment on cash and note payable)
Dec.1	Prepaid Rent	9600
	Cash		9600
	(Rent paid for three months)
Dec.4	Office Supplies	1900
	Accounts Payable		1900
	(Purchase of office supplies on account)
Dec.8	Cash	8600
	Unearned Rental Fee Income		8600
	(Advace rental fee received)
Dec.12	Salaries Expense	5200
	Cash		5200
	(Payment of salaries for the first two weeks)
Dec.15	Cash	12600
	Accounts Receivable	6200
	Rental fees Earned		18800
	(Rental fee earned for the first two weeks)
Dec.17	Rental Equipment Maintenance Expense	800
	Accounts Payable		800
	(Purchase of maintenance spares on account)
Dec.23	Cash	2500
	Accounts Receivable		2500
	(Collections from custoers on account)
Dec.26	No entry required
Dec.26	Salaries Expense	5200
	Cash		5200
	(Salaries paid for the second bi-weekly period)
Dec.27	Accounts Payable	800
	Cash		800
	(Payment made to earht monvers inc.)
Dec.28	Dividends	2100
	Dividend Payable		2100
	(Declaration of dividend of 10 cents per share on 21,000 shares)
Dec.29	No entry neded, since the liability for the company cannot be ascertained.
Dec.29	Unexpired Uinsurance	8880
	Cash		8880
	(Insurance purchased for 12 months)
Dec.31	Utilities Expense	650
	Accounts Payable		650
	(Utilities bill for the month )
Dec.31	Cash	15700
	Accounts Receivable	4400
	Rental fees Earned		20100
	(Rental fee earned for the second half of the month)

2.

TROY EQUIPMENT RENTALS
Trial Balance Worksheet
Account	Unadjusted
	Debit	Credit
Cash	85720
Accounts Receivable	8100
Prepaid Rent	9600
Unexpired Uinsurance	8880
Office Supplies	1900
Equipment	249600
Accumulated Depreciation		0
Notes Payable		115600
Accounts Payable		2550
Interest Payable		0
Salaries Payable		0
Dividends Payable		2100
Unearned Rental Fee Income		8600
Income Tax Payable		0
Capital stock		210000
Retained Earnings		0
Dividends	2100
Income Summary
Rental Fees Earned		38900
Salaries expense	10400
Rental Equipment Maintenance expense	800
Utilities expense	650
Rent Expense	0
Office Supplies Expense	0
Depreciation expense	0
Interest Expense	0
Income Tax Expense	0
Total	377750	377750

3.

TROY EQUIPMENT RENTALS
Adjusting Journal Entries for the month of December , Year 1
Event	Account Title	Debit	Credit
a	Rent Expense	3200
	Prepaid Rent		3200
	(Rent expense for the month of December)
b	Interest Expense	578
	Interest Payable		578
	(Interest at 6% p.a., on the note of $115,600)
c	Depreciation expense	2600
	Accumulated epreciation		2600
	(Depreciation on equipment with 8-year life )
d	Office Supplies Expense	1230
	Office Supplies		1230
	(Office supplies used for the month)
e	Unearned Rental Fee Income	4300
	Rental Fee Earned		4300
	(Rentsl Fee earned from the advance received)
f	Accounts Receivable	1800
	Rental fees Earned		1800
	(Rental fee for backhoe for 6 days at $300 per day)
g	Salaries Expense	1700
	Salaries Payable		1700
	(Salaries accrued and unpaid for the month)
h	Income Tax Expense	9537
	Income Tax Payable		9537
	(Income tax expense for the month)
	Depreciation expense
	Cost of the equipment	249600
	Estimated life	8 years
	Annual depreciation expense (249,600 / 8)	31200
	Depreciation for one month	2600
	Income Tax expense
	Total Revenue	45000
	Total Expense	21158
	Taxable income	23842
	Income Tax - @40%	9537

4.

TROY EQUIPMENT RENTALS
Income Staement
for the year ended December 31, Year 1
Rental Fee earned	45000
Expenses
Salaries expense	12100
Rental Equipment Maintenance expense	800
Utilities expense	650
Rent Expense	3200
Office Supplies Expense	1230
Depreciation expense	2600
Interest Expense	578
Income Tax Expense	9537
Total Expenses	30695
Net Income	14305
TROY EQUIPMENT RENTALS
Statement of retained earnings
for the year ended December 31, Year 1
Balance , january 1	0
Net income for the year	14305
Total	14305
Dividends declared	-2100
Balance , December 31	12205
TROY EQUIPMENT RENTALS
Balance sheet
December 31, Year 1
Assets
Current Assets
Cash		85720
Accounts Receivable		9900
Prepaid Rent		6400
Unexpired Uinsurance		8880
Office Supplies		670
Current Assets		111570
Equipment	249600
Accumulated Depreciation	2600	247000
Total Assets		358570
Liabilities and stockholders' Equity
Current Liabilities
Notes Payable		115600
Accounts Payable		2550
Interest Payable		578
Salaries Payable		1700
Dividends Payable		2100
Unearned Rental Fee Income		4300
Income Tax Payable		9537
Total Liabilities		136365
Stockholders' equity
Capital Stock		210000
Retained Earnings		12205
Total Stockholders' equity		222205
Total liabilities and stockholders' equity		358570

5.

TROY EQUIPMENT RENTALS
Trial Balance Worksheet
Account	Post Closing
	Debit	Credit
Cash	85720
Accounts Receivable	9900
Prepaid Rent	6400
Unexpired Uinsurance	8880
Office Supplies	670
Equipment	249600
Accumulated Depreciation		2600
Notes Payable		115600
Accounts Payable		2550
Interest Payable		578
Salaries Payable		1700
Dividends Payable		2100
Unearned Rental Fee Income		4300
Income Tax Payable		9537
Capital stock		210000
Retained Earnings		12205
Dividends
Income Summary
Rental Fees Earned
Salaries expense
Rental Equipment Maintenance expense
Utilities expense
Rent Expense
Office Supplies Expense
Depreciation expense
Interest Expense
Income Tax Expense
Total	361170	361170