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Acc101 Financial Accounting: Comprehensive Problem 1 Susquehanna Equipment Rentals

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Question;Acc101 Financial Accounting;Comprehensive Problem 1: A COMPREHENSIVE ACCOUNTING CYCLE PROBLEM;On December 1, 2009, John and Patty Driver formed a corporation called;Susquehanna Equipment Rentals. The new corporation was able to begin operations;immediately by purchasing the asset 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 Income Taxes Payable;Accounts Receivable Capital;Stock;Prepaid Rent Retained;Earnings;Unexpired Insurance Dividends;Office Supplies Income Summary;Rental Equipment Rental;Fees Earned;Accumulated Depreciation: Rental Equipment Salaries Expense;Notes Payable Maintenance;Expense;Accounts Payable Utilities;Expense;Interest Payable Rent;Expense;Salaries Payable Office;Supplies Expense;Dividends Payable Depreciation;Expense;Unearned Rental Fees Interest;Expense;Income Taxes;Expense;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 total of $200,000 cash.;Dec.1 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.;Dec.1 Paid $12,000 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.;$1,000. Payment due in 30 days. (These supplies are expected to last for;several month: debit the Office Supplies asset account.);Dec 8 Received $8,000 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, $5,200.;Dec 15 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.;Dec 17 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.;Dec 23 Collected $2,000 of the accounts receivable recorded on December;15.;Dec 23 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.;Dec 26 Paid biweekly salaries, $5,200.;Dec 27 Paid the account payable to Earth Movers, Inc., $600.;Dec 28 Declared a dividend of 10 cents per share, payable on January;15, 2010.;Dec. 29 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.);Dec 29 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, 2010, 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, $700. Payment is due in 30 days.;Dec 31 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;a) The advance payment of;rent on December 31 covered a period of three month.;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 $600.;e) During December, the;company earned $3,700 of the rental fees paid in advance by McNamer;Construction Co. on December 8.;f) As of December 31, six;days' rent on the backhoe rented to Mission Landscaping on December 23 has been;earned;g) Salaries earned by;employees since the last payroll date (December 26) amounted to $1,400 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 2010.;Instructions;a. Journalize the December transactions.;b. Prepare the necessary adjusting entries.;c. Post the December transactions and adjusting entries to ledger;accounts.;d. Prepare a 10-column worksheet for the year ended December 31.;e. 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.;f. 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.;g. Prepare closing entries and post to ledger accounts.;h. Prepare an after-closing trial balance as of December 31.;i. 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.;j. 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?

 

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