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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 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: 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 $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. The note, plus all 12-months of accrued interest, are due November 30, 2016. 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 months; 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. 26 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, 2016. 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, 2016, 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 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 $600. e. During December, the company earned $3,700 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 $1,400 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 2016. rev: 08_14_2014_QC_52446 · Record the issuance of cash. · 2. Record the purchase of equipment formerly owned by Rent-It. · 3. Record the payment of rent in advance for three months. · 4. Record the purchase of office supplies on account. · 5. Record the cash received as advance payment on equipment rental. · 6. Record the salaries paid for the first two weeks. · 7. Record the rental fees earned in first 15 days of December. · 8. Record the purchase of repair parts on account. · 9. Record the collection of an accounts receivable. · 10. Record the rental of backhoe. · 11. Record the payment of biweekly payroll. · 12. Record the payment of account payable to Earth Movers, Inc. · 13. Record the dividend declared. · 14. Record the entry of lawsuit. · 15. Record the purchase of 12-month liability policy. · 16. Record the utilities for December. · 17. Record the rental fees earned in the second half of December. · 1. Record the rent expense for December. · 2. Record the interest on note payable to Rent-It. · 3. Record the depreciation for December. · 4. Record the office supplies used during the month. · 5. Record the portion of advance payment by McNamer Construction Co. · 6. Record the fees earned from Mission Landscaping on backhoe rental. · 7. Record the accrued salaries payable at month-end. · 8. Record the income taxes for December. · 1. Record the entry to close revenue earned to income summary. · 2. Record the entry to close all expense accounts to income summary. · 3. Record the entry to transfer net income earned in 2015 to the retained earnings account. · 4. Record the entry to transfer dividends declared in 2015 to the retained earnings account.

Sample Paper For Above instruction

Introduction

The formation of a new corporation involves multiple financial transactions that establish its initial capital, set up assets, and record ongoing business activities. Proper accounting for these transactions, particularly in the context of a newly established equipment rental company, requires comprehensive understanding and accurate journal entries. This paper aims to illustrate the process of recording December transactions for Susquehanna Equipment Rentals, emphasizing key accounting principles such as asset acquisition, liabilities, revenue recognition, and expense matching. The company’s initial operations, adjustments, closing entries, and considerations surrounding legal issues and insurance policies will be analyzed to provide a thorough understanding of the accounting cycle in a new business environment.

Initial Capital and Asset Acquisition

The first significant transaction occurred on December 1, 2015, when the owners, John and Patty Driver, issued 20,000 shares of stock for $200,000 cash. This entry reflects the initial infusion of capital into the company, establishing the cash and stock accounts. Simultaneously, the company purchased equipment worth $240,000 from Rent-It, financed by a combination of cash payment and a note payable. Recording these entries involves debiting cash and equipment accounts and crediting common stock and notes payable, aligning with the accounting principles of asset recognition and financing (Kieso, Weygandt, & Warfield, 2019).

Prepaid Expenses and Supplies

On December 1, the company paid $12,000 for three months' rent in advance, representing a prepaid expense. This requires debiting a prepaid rent asset account and crediting cash. Over time, as rent expense accrues monthly, an adjusting entry will debit rent expense and credit prepaid rent. In addition, office supplies purchased on December 4 for $1,000 are initially recorded as assets, which are subsequently adjusted at month-end to reflect supplies used, following the matching principle.

Revenue Recognition and Unearned Revenue

The company received $8,000 in advance from McNamer Construction on December 8, crediting unearned rental fees. As services are performed, a proportionate amount of unearned revenue is recognized as earned. In December, rental fees earned totaled $18,000 from the first 15 days and $20,000 from the second half of December, representing revenue recognition based on services rendered during the period. Cash collections of these amounts are recorded separately, aligning with the cash basis and accrual basis principles.

Expenses and Adjustments

Expenses such as salaries, repairs, utilities, and depreciation are recorded based on the matching principle, matching expenses to the periods in which they are incurred. Salaries paid during the first two weeks; adjustments for accrued salaries of $1,400 at month-end; depreciation of rental equipment over eight years using straight-line; and utilities expense of $700 are examples of expense recognition. Additionally, supplies used during December, estimated at $600, require an adjusting entry to reflect actual supplies on hand.

Liabilities and Legal Issues

Liabilities such as accounts payable to Earth Movers, salaries payable, interest payable on the note, and unearned rental fees are recorded to acknowledge obligations. The lawsuit against the company, while not requiring an immediate journal entry, must be disclosed in notes, as it may have potential financial implications affecting future liabilities. The company’s legal and insurance considerations, including a liability policy purchased effective January 1, 2016, are also crucial components of prudent risk management.

Closing Entries and Financial Statements

At year-end, the company performs closing entries to transfer revenues and expenses to income summary and then to retained earnings. Dividends declared are deducted from retained earnings, reducing accumulated earnings. These steps summarize the financial performance and position, providing accurate data for reporting. The closing process ensures temporary accounts are reset for the next fiscal period, complying with Generally Accepted Accounting Principles (GAAP).

Conclusion

Recording transactions for Susquehanna Equipment Rentals illustrates fundamental accounting processes essential for new enterprises. Accurate documentation of initial investments, asset acquisitions, revenue recognition, expense matching, and closing procedures underpins reliable financial reporting. Moreover, considerations related to legal liabilities, insurance, and adjusting entries highlight the complexities faced by startups in establishing compliant and transparent financial records. Proper application of accounting principles ensures clarity, accountability, and informed decision-making for stakeholders.

References

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