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COMPREHENSIVE ACCOUNTING CYCLE PROBLEM
On December 1, 2015, 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:
The corporation performs adjusting entries monthly. Closing entries are performed annually on December 31. During December, the corporation entered into the following transactions:
Issued to John and Patty Driver 20,000 shares of capital stock in exchange for a total of $200,000 cash.
Purchased for $240,000 all of the equipment formerly owned by Rent-It. Paid $140,000 cash and issued a one-year note payable for $100,000. The note, plus all 12-months of accrued interest, are due November 30, 2016.
Paid $12,000 to Shapiro Realty as three months’ advance rent on the rental yard and office formerly occupied by Rent-It.
Purchased office supplies on account from Modern Office Co., $1,000. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)
Received $8,000 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.)
Paid salaries for the first two weeks in December, $5,200.
Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,000, of which $12,000 was received in cash.
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.
Collected $2,000 of the accounts receivable recorded on December 15.
Rented a backhoe to Mission Landscaping at a price of $250 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two or three weeks.
Paid biweekly salaries, $5,200.
Paid the account payable to Earth Movers, Inc., $600.
Declared a dividend of 10 cents per share, payable on January 15, 2016.
Susquehanna Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co-defendant in a $25,000 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.)
Purchased a 12-month public-liability insurance policy for $9,600. 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, 2016, and affords no coverage for the injuries sustained by Kevin Davenport on December 26.
Received a bill from Universal Utilities for the month of December, $700. Payment is due in 30 days.
Equipment rental fees earned during the second half of December amounted to $20,000, of which $15,600 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 $600.
During December, the company earned $3,700 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 $1,400 at month-end.
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 2016.
Perform the following steps of the accounting cycle for the month of December:
Journalize the December transactions. Do not record adjusting entries at this point.
Post the December transactions to the appropriate ledger accounts.
Prepare the unadjusted trial balance columns of a 10-column worksheet for the year ended December 31.
Prepare the necessary adjusting entries for December.
Post the December adjusting entries to the appropriate ledger accounts.
Complete the 10-column worksheet for the year ended December 31.
Prepare an income statement and statement of retained earnings for the year ended December 31, and a balance sheet (in report form) as of December 31.
Prepare required disclosures to accompany the December 31 financial statements. Your solution should include a separate note addressing each of the following areas: (1) depreciation policy, (2) maturity dates of major liabilities, and (3) potential liability due to pending litigation.
Prepare closing entries and post to ledger accounts.
Prepare an after-closing trial balance as of December 31.
During December, this company’s cash balance has fallen from $200,000 to $65,000. Does it appear headed for insolvency in the near future? Explain your reasoning.
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?
Please note the correct ‘Trial Balance’ is included on the provided Excel Template file. The format for the 10 column worksheet appears on page 211 of the text. There should be eight separate adjusting entries. The total for the adjustments column should equal $23,080.
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