Comprehensive Accounting Cycle Problem

Comprehensive Problemcomprehensive Accounting Cycle Problemon December

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.

Paper For Above instruction

The comprehensive accounting cycle is essential for accurately reflecting a company's financial position at the end of an accounting period. This process involves several systematic steps, including journalizing transactions, posting to ledger accounts, preparing trial balances, making necessary adjusting entries, completing worksheet analyses, and preparing financial statements. Additionally, closing entries finalize the period, and a subsequent after-closing trial balance ensures all accounts are correctly balanced. This paper demonstrates these steps using the December transactions of Susquehanna Equipment Rentals, a newly formed corporation, emphasizing the importance of accuracy, compliance, and ethical considerations in financial reporting.

Introduction

The initial formation of Susquehanna Equipment Rentals involved various significant transactions that impact its financial statements. These transactions, such as issuing capital stock, purchasing equipment, and entering into leasing and rental agreements, set the foundation for the company's financial activities for December 2015. Proper recording and adjustments are critical to ensure that revenues and expenses are recognized accurately, assets and liabilities are stated correctly, and the company's financial health is transparently presented.

Journalizing Transactions

The first step involves recording all December transactions in the company's journal. For instance, the issuance of common stock on December 1st would be debited to Cash and credited to Common Stock and Additional Paid-in Capital, reflecting the capital infusion. Equipment purchases are recorded as debits to Equipment, with credits to Cash and Notes Payable, recognizing the purchase and financing method. Rent payments, supplies, warranties, and other expenses must be journalized under appropriate account titles, ensuring accuracy in each entry.

Posting to Ledger Accounts

Following journal entries, the transactions are posted to subsidiary ledger accounts, such as Cash, Equipment, Notes Payable, Rent Expense, Supplies, and Revenue Accounts. This step consolidates the company’s individual transactions into account balances, which facilitate the preparation of financial statements and trial balances. Accurate posting ensures the integrity of subsequent analyses, especially in calculating balances for adjustments and financial reports.

Preparing the Unadjusted Trial Balance

An unadjusted trial balance is prepared to verify that total debits equal total credits before adjustments. Using the ledger account balances, the trial balance provides a snapshot of the company's financial data at December 31. It serves as a foundation for identifying discrepancies and preparing necessary adjusting entries, which address accruals, deferrals, depreciation, and other timing differences.

Adjusting Entries

Eight adjusting entries are developed based on the provided data and estimates, with total adjustments amounting to $23,080, reflecting various accruals and deferrals. These include accruing interest on notes payable, recognizing depreciation on equipment, adjusting for supplies on hand, accruing rent revenues, and recognizing wages earned but unpaid. For example, the depreciation policy employs straight-line depreciation over eight years, and the adjusting entry allocates a monthly depreciation expense accordingly. Accurate adjustments ensure that revenues and expenses are recorded in the period they are incurred, complying with the matching principle and accrual accounting standards.

Completing the Worksheet and Preparing Financial Statements

The 10-column worksheet combines unadjusted trial balances with adjustments to produce adjusted trial balances, income statement, and balance sheet columns. The worksheet facilitates cross-verification of account balances after adjustments. The income statement summarizes revenues and expenses, revealing net income, which is then used in the statement of retained earnings. The balance sheet consolidates assets, liabilities, and equity, providing a comprehensive view of the company’s financial position as of December 31.

Notes and Disclosures

Critical disclosures include the depreciation policy, specifying the straight-line method over eight years, and descriptions of the maturity dates of liabilities such as the note payable due in November 2016. Additionally, the lawsuit filed on December 29 poses potential liability risks, which must be disclosed in the notes, indicating uncertainty regarding the company's legal exposure and insurance coverage, especially since the policy takes effect on January 1, 2016. Proper disclosures provide transparency and inform users about significant risks and accounting policies.

Closing Entries and Trial Balance

Closing entries transfer revenues and expenses to Retained Earnings, resetting temporary accounts for the new fiscal period. Post-closing, an after-closing trial balance confirms the closing process's accuracy. The significant decline in cash balances from $200,000 to $65,000 raises concerns about cash flow management and potential future insolvency. A detailed analysis suggests that negative cash flow and high liabilities could threaten the company's solvency unless corrective measures are implemented.

Ethical Considerations

Maintaining accurate financial records is an ethical obligation. Patty Driver, being an owner, should not manage the accounting records to ensure independence and prevent conflicts of interest. Outsourcing or employing independent professional accountants is recommended to uphold integrity, transparency, and compliance with accounting standards.

Conclusion

The December accounting cycle for Susquehanna Equipment Rentals exemplifies the importance of detailed and accurate financial recordkeeping, timely adjustments, clear disclosures, and adhering to ethical standards. Proper execution of these steps ensures meaningful financial reporting, supports strategic decision-making, and maintains stakeholder trust. The observed cash decline and potential liabilities underscore the need for vigilant financial management and ethical governance.

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