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Comprehensive Account Problem

• Dec 1 Issued to John & Patty Driver 20,000 of capital stock in exchange for $200,000 cash

• Dec 1 Purchased for $240,000 all of the equipment formerly owned by Rent-it. Paid $149,000 Cash and issued a 1 year note payable for 100,000

• Dec 1 Paid 12,000 to Shapiro Realty as the 3 months advance rent on the rental yard and office formerly occupied by Rent-it.

• Dec 4th 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 8th Received $8,000 Cash advance payment on equipment rental from Mcnamer construction company.(Credit Unearned Rental Fees)

• Dec 12th Paid salaries for the first 2 weeks in December $5200

• Dec 15th 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 17th Puchased on account from Earth Movers, Inc. $600 in parts needed to repair a rental tractor.(Debit an expense account) ,Payment due in 10 days.

• Dec 23 Collected $2,000 of the accounts receivable recorded on Dec 15.

• Dec 23 Rented a backhoe to Mission Landscaping at a price of 250.00 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about 2-3 weeks.

• Dec 26th Paid Biweekly salaries $5200

• Dec 27 Paid the account payable Earth Movers Inc. 600.00

• Dec 28 Declared a dividend of 10 cents per share payable on Jan.15 2008

• Dec 29 Susquenna equip rentals was named along with Mission Landscaping and Coller Construction as a co defendant in a 25000 lawsuit filed on behalf of Kevin Davenport. Mission Landscaping had left the rented backhoe in a fenced construction site owned by Coller Construction. After working hours on Dec 26, Davenport had climbed the fence to play on parked construction equipment. while playing he fell and broke his arm.The extent of the companies legal and financials responsibility if any cannot be determined at this time.(This event does not require a journal entry at this time but may require disclosure in notes accompanying statements.

• Dec 29 Purchased a 12 month public liability insurance policy for 9600.This policy protects the company against liability for injuries and property damage caused by it’s equipment. The policy goes into effect Jan 1st 2008 and afford no coverage to the Davenport injuries of Dec 26th.

• Dec 31 Received a bill from Universal Utilities for the month of December for 700.00.Payment is due in 30 days

• Dec 31 Equipment rental fees earned during the 2nd half of December amounted to @20,000 of which $15,600 was received in cash.

Data for Adjusting Entries

a) The advance payment on December 1 covered a period o 3 months

b) The annual interst rate on the note payable to Rent-it is 6%

c) The rental equip. is being depreciated by the straight-line method over a period of 8 years.

d) Office Supplies on hand Dec 31 are estimated at 600.00

e) During December the company earned 3,700 of the rental fees paid in advance by Mcnamer Construction Company on Dec,8

f) As of Dec 21, 6 days rent on the backhoe rented to Mission Landscape on Dec 23 has been earned.

g) Salaries earned by employees since the last payroll date Dec 26 amounted to 1400 at month end.

h) It is estimated that the company is subject to a combined federal and state income tax rate of 40% of income before income taxes.(Total revenue minus all expenses other than income taxes.) These taxes will be payable in 2008.

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 Dec 31

e) Prepare an income statement and statement of retained earnings for the year ended a Dec 31 and a balance sheet(In report form) as of Dec 31 st.

f) Prepare required disclosures to accompany the Dec 31st 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 liabilities due to pending litigation.

g) Prepare closing entries and post to ledger accounts

h Prepare an after closing trial balance as of Dec 31

i) During December this companies cash balance has fallen from 200,000 to 65,000.Does it appear headed to 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 else who is independent of the organization?

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