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.

Answer 1

1-a. In the books of Susquehanna Equipment Rentals:

Date	General Journal	Debit	Credit
		$	$
Dec 1	Cash	240,000
	Common Stock		240,000
Dec 1	Rental Equipment	288,000
	Cash		168,000
	Notes Payable		120,000
Dec 1	Prepaid Rent	14,400
	Cash		14,400
Dec 4	Office Supplies	1,200
	Accounts Payable		1,200
Dec 8	Cash	9,600
	Unearned Rental Fees		9,600
Dec 12	Salaries Expense	6,240
	Cash		6,240
Dec 15	Cash	14,400
	Accounts Receivable	7,200
	Rental Fees Earned		21,600
Dec 17	Maintenance Expense	720
	Accounts Payable		720
Dec 23	Cash	2,400
	Accounts Receivable		2,400
Dec 26	No journal entry required	0	0
Dec 26	Salaries Expense	6,240
	Cash		6,240
Dec 27	Accounts Payable	720
	Cash		720
Dec 28	Dividends	2,400
	Dividends Payable		2,400
Dec 29	No journal entry required	0	0
Dec 29	Unexpired Insurance	11,520
	Cash		11,520
Dec 31	Utilities Expense	840
	Accounts Payable		840
Dec 31	Cash	18,720
	Accounts Receivable	5,280
	Rental Fees Earned		24,000

1-b. Adjusting Entries:

Adjustment #	Account Titles	Debit	Credit
		$	$
a.	Rent Expense ( $ 14,400 / 3)	4,800
	Prepaid Rent		4,800
b.	Interest Expense ( $ 120,000 x 6% x 1/12)	600
	Interest Payable		600
c.	Depreciation Expense ( $ 288,000 / ( 8 x 12)	3,000
	Accumulated Depreciation : Rental Equipment		3,000
d.	Office Supplies Expense $ ( 1,200 -720)	480
	Office Supplies		480
e.	Unearned Rental Fees	4,440
	Rental Fees Earned		4,440
f.	Accounts Receivable	1,800
	Rental Fees Earned		1,800
g.	Salaries Expense	1,680
	Salaries Payable		1,680
h.	Income Taxes Expense	10,896
	Income Taxes Payable		10,896

1-c. Closing Entries:

Date	Account Titles	Debit	Credit
December 31, Year 1		$	$
a.	Rental Fees Earned	51,840
	Income Summary		51,840
	To close the revenue account.
b.	Income Summary	35,496
	Salaries Expense		14,160
	Rent Expense		4,800
	Utilities Expense		840
	Maintenance Expense		720
	Office Supplies Expense		480
	Depreciation Expense		3,000
	Interest Expense		600
	Income Taxes Expense		10,896
	To close expense accounts
c.	Income Summary	16,344
	Retained Earnings		16,344
	To close income summary.
d.	Retained Earnings	2,400
	Dividends		2,400
	To close dividends to retained earnings.