COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS Susquehanna Equipment Rentals A mini-practice set illustrating the complete accounting cycle for a service-type business. Includes computation of income taxes expense (as a percentage of income before taxes) and an evaluation of solvency. Can be done as a group assignment.
5 to 6 hours Strong
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5 to 6 hours, Strong
COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS
a. General Journal December Daily Transactions 2015 Dec 1 Cash
200,000
Capital Stock Owner invested cash in the business. 1 Rental Equipment Cash Notes Payable Purchased equipment from Rent-it. Note payable is due in one year. 1 Prepaid Rent Cash Paid three months' rent in advance to Shapiro Realty.
200,000 240,000 140,000 100,000
12,000 12,000
4 Office Supplies Accounts Payable Purchased supplies on account; payment due in 30 days.
1,000
8 Cash
8,000
1,000
Unearned Rental Fees Received advance payment for equipment rental by McNamer Construction Company.
8,000
12 Salaries Expense Cash Paid salaries for first two weeks in December.
5,200
15 Cash Accounts Receivable Rental Fees Earned To record rental fees earned in first 15 days of December,
12,000 6,000
17 Maintenance Expense Accounts Payable To record purchase of repair parts on account from Earth Movers, Inc.; payment due in 10 days. 23 Cash Accounts Receivable Collection of an accounts receivable.
5,200
18,000
600 600
2,000 2,000
26 (No entry required to record rental of backhoe.)
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. General Journal December Daily Transactions 2015 Dec 26 Salaries Expense Cash Paid biweekly payroll. 27 Accounts Payable Cash Paid account payable to Earth Movers, Inc. 28 Dividends Dividends Payable Declared a dividend of 10 cents per share payable on January 15, 2016.
5,200 5,200 600 600 2,000 2,000
29 (No journal entry required to record lawsuit.) 29 Unexpired Insurance Cash Purchased 12-month liability policy, effective January 1, 2016.
9,600 9,600
31 Utilities Expense Accounts Payable Utilities for December; payment due in 30 days.
700
31 Cash Accounts Receivable Rental Fees Earned To record rental fees earned in the second half of December.
15,600 4,400
700
20,000
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. General Journal (Adjusting Entries) 2015 Dec 31 Rent Expense Prepaid Rent To recognize rent expense for December. 31 Interest Expense Interest Payable Interest on note payable to Rent-It ($100,000 x 6% x 1/12). 31 Depreciation Expense Accumulated Depreciation: Rental Equip. Depreciation for December ($240,000 ÷ 8 years x 1/12 = $2,500). 31 Office Supplies Expense Office Supplies To record office supplies used during the month. ($1,000 - $600 = $400)
4,000 4,000 500 500
2,500 2,500
400 400
31 Unearned Rental Fees Rental Fees Earned To record portion of advance payment by McNamer Construction Co. earned during December.
3,700
31 Accounts Receivable Rental Fees Earned To record fees earned from Mission Landscaping on backhoe rental (6 days x $250 per day).
1,500
31 Salaries Expense Salaries Payable To record accrued salaries payable at month-end.
1,400
31 Income Taxes Expense Income Taxes Payable To record income taxes for December [($43,200 $11,800 - $600 - $700 - $4,000 - $400 -$2,500 - $500) x x 40%].
9,080
3,700
1,500
1,400
9,080
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. Date Dec 1 1 1 8 12 15 23 26 27 29 31
Explanation
Date Dec 15 23 31 31
Explanation
Date Dec 1 31
Explanation
Date Dec 29
Explanation
Date Dec 4 31
Explanation
Cash Debit 200,000
Credit 140,000 12,000
8,000 5,200 12,000 2,000 5,200 600 9,600 15,600 Accounts Receivable Debit 6,000
Credit 2,000
4,400 1,500
Prepaid Rent Debit 12,000
Credit 4,000
Unexpired Insurance Debit 9,600
Office Supplies Debit 1,000
Balance 200,000 60,000 48,000 56,000 50,800 62,800 64,800 59,600 59,000 49,400 65,000
Balance 6,000 4,000 8,400 9,900
Balance 12,000 8,000
Credit
Balance 9,600
Credit
Balance 1,000 600
400
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. Date Dec 1
Date Dec 31
Explanation
Rental Equipment Debit 240,000
Credit
Balance 240,000
Accumulated Depreciation: Rental Equipment Debit Credit Explanation 2,500
Date Dec 1
Explanation
Notes Payable Debit
Date Dec 4 17 27 31
Explanation
Accounts Payable Debit
Date Dec 31
Explanation
Credit 100,000
Balance 100,000
Credit 1,000 600 700
Balance 1,000 1,600 1,000 1,700
500
Balance 500
600
Interest Payable Debit
Balance 2,500
Credit
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. Date Dec 31
Explanation
Salaries Payable Debit
Date Dec 28
Explanation
Dividends Payable Debit
Date Dec 8 31
Explanation
Unearned Rental Fees Debit
Date Dec 31
Explanation
Income Taxes Payable Debit
Date Dec 1
Explanation
Capital Stock Debit
Credit 1,400
Balance 1,400
Credit 2,000
Balance 2,000
Credit 8,000
Balance 8,000 4,300
Credit 9,080
Balance 9,080
Credit 200,000
Balance 200,000
3,700
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. & d. Date Explanation Dec 31 Income, 2015 31 Dividends
Date Dec 28 31 To close
Explanation
Retained Earnings Debit
Credit 13,620
Balance 13,620 11,620
Credit
Balance 2,000 0
2,000
Dividends Debit 2,000
2,000
Date Explanation Dec 31 To close revenue accounts 31 To close expense accounts 31 To close
Date Dec 15 31 31 31 31 To close
Explanation
Date Dec 12 26 31 31 To close
Explanation
Income Summary Debit
Credit 43,200
Balance 43,200 13,620 0
Credit 18,000 20,000 3,700 1,500
Balance 18,000 38,000 41,700 43,200 0
Credit
Balance 5,200 10,400 11,800 0
29,580 13,620
Rental Fees Earned Debit
43,200
Salaries Expense Debit 5,200 5,200 1,400
11,800
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. & d. Date Dec 17 30 To close
Explanation
Date Dec 31 31 To close
Explanation
Date Dec 31 31 To close
Explanation
Date Dec 31 31 To close
Explanation
Maintenance Expense Debit 600
Utilities Expense Debit 700
Rent Expense Debit 4,000
Office Supplies Expense Debit 400
Credit 600
Balance 600 0
700
Balance 700 0
4,000
Balance 4,000 0
Credit
Credit
Credit 400
Balance 400 0
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) a. & d. Date Dec 31 31 To close
Explanation
Depreciation Expense Debit 2,500
Credit 2,500
Date Dec 31 31 To close
Explanation
Date Dec 31 31 To close
Explanation
Interest Expense Debit 500
Income Taxes Expense Debit 9,080
Credit
Balance 2,500 0
500
Balance 500 0
9,080
Balance 9,080 0
Credit
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued)
SUSQUEHANNA EQUIPMENT RENTALS Worksheet December 31, 2015 a. Trial Balance Debit Credit Balance sheet accounts : Cash Accounts receivable Prepaid rent Unexpired insurance Office supplies Rental equipment Notes payable Accounts payable Unearned rental fees Dividends payable Capital stock Retained earnings Dividends Interest payable Accum. Dep.: rental equip. Salaries payable Income taxes payable Income statement accounts: Rental fees earned Salaries expense Maintenance expense Utilities expense
$
65,000 8,400 12,000 9,600 1,000 240,000
Debit
Adjustments* Credit
Adjusted Trial Balance Debit Credit $
(f)
$ 100,000 1,700 8,000 2,000 200,000 -
(e)
$
1,500 (a)
$ 4,000
(d)
400
65,000 9,900 8,000 9,600 600 240,000
3,700
$ 65,000 9,900 8,000 9,600 600 240,000 $ 100,000 1,700 4,300 2,000 200,000
2,000
38,000
Balance Sheet Debit Credit
$ 100,000 1,700 4,300 2,000 200,000
2,000
10,400 600 700 $ 349,700
Income Statement Debit Credit
2,000
(b) (c) (g) (h)
500 2,500 1,400 9,080
500 2,500 1,400 9,080
(e) (f)
3,700 1,500
43,200
(g)
1,400
11,800 600 700
(a) (b) (c) (d) (h)
4,000 500 2,500 400 9,080 $ 23,080
4,000 500 2,500 400 9,080 364,680
500 2,500 1,400 9,080 $ 43,200 $
11,800 600 700
$ 349,700
Rent expense Interest expense Depreciation expense Office supplies expense Income taxes expense
$ 23,080
$
$ 364,680
Net income Totals * Adjustments (a) December rent expense ($12,000 ÷ 3). (b) December interest expense ($100,000 x 6% x 1/12). (c) December depreciation expense ($240,000 ÷ 96 months). (d) Office supplies used in December ($1,000 - $600).
$
4,000 500 2,500 400 9,080 29,580
43,200
335,100
321,480
13,620 43,200
$ 43,200
$ 335,100
13,620 $ 335,100
(e) Portion of unearned revenue earned in December. (f) Accrued revenue earned in December. (g) Accrued salaries at month-end. (h) Accrued income taxes expense at month-end.
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) b. SUSQUEHANNA EQUIPMENT RENTALS Income Statement For the Year Ended December 31, 2015 Revenue: Rental fees earned Expenses Salaries expense Maintenance expense Utilities expense Rent expense Office supplies expense Depreciation expense Interest expense Income before income taxes expense Income taxes expense @ 40% Net income
$ $
SUSQUEHANNA EQUIPMENT RENTALS Statement of Retained Earnings For the Year Ended December 31, 2015 Retained earnings, December 1, 2015 Net income Subtotal Less: Dividends Retained earnings, December 31, 2015
11,800 600 700 4,000 400 2,500 500
43,200
$
20,500 22,700 9,080 13,620
$
$0 13,620 13,620 2,000 11,620
$
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) b. SUSQUEHANNA EQUIPMENT RENTALS Balance Sheet December 31, 2015 Assets Cash Accounts Receivable Prepaid rent Unexpired insurance Office supplies Rental equipment Less: Accumulated depreciation Total assets Liabilities & Stockholders' Equity Liabilities: Notes payable Accounts payable Interest payable Salaries payable Dividends payable Unearned rental fees Income taxes payable Total liabilities Stockholders' equity: Capital stock Retained earnings Total Stockholders' Equity Total liabilities and stockholders' equity
c.
$
240,000 2,500 $
$
$ $ $ $
65,000 9,900 8,000 9,600 600 237,500 330,600
100,000 1,700 500 1,400 2,000 4,300 9,080 118,980 200,000 11,620 211,620 330,600
Notes to the financial statements: Note 1—Depreciation policies Depreciation expense in the financial statements is computed by the straight-line method. The estimated useful life of the rental equipment is 8 years. Note 2—Maturity dates of liabilities The Company’s notes payable consist of a single obligation which matures on November 30, 2016. The maturity value of this note, including interest, will amount to $106,000. Note 3—Pending litigation The Company has been named as a co-defendant in a $25,000 personal injury lawsuit. The extent of legal and financial responsibility, if any, cannot be determined at this time.
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued) d. General Journal (Closing Entries) 2015 Dec 31 Rent Fees Earned Income Summary To close the revenue account.
43,200 43,200
31 Income Summary Salaries Expense Maintenance Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense Interest Expense Income Taxes Expense To close the expense accounts.
29,580
31 Income Summary Retained Earnings To close the Income Summary account.
13,620
11,800 600 700 4,000 400 2,500 500 9,080
13,620
31 Retained Earnings Dividends To close the Dividends account.
2,000 2,000
e. SUSQUEHANNA EQUIPMENT RENTALS After-Closing Trial Balance December 31, 2015 $
Cash Accounts receivable Prepaid rent Unexpired insurance Office supplies Rental equipment Accumulated depreciation: rental equipment Notes payable Accounts payable Interest payable Salaries payable Dividends payable Unearned rental fees Income taxes payable Capital stock Retained earnings Totals
65,000 9,900 8,000 9,600 600 240,000 $
$
333,100 $
2,500 100,000 1,700 500 1,400 2,000 4,300 9,080 200,000 11,620 333,100
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COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (concluded) f. It does not appear that the company faces any immediate solvency problems. It did start with $200,000 cash, but in its first transaction the company spent $140,000 on equipment, leaving only $60,000 cash to begin operations. This amount had increased to $65,000 by the end of December. Thus, during its first month of operations, the business was able to generate $5,000 of positive cash flow from operations. The $100,000 note payable due on November 30, 2016, does raise a potential concern about the company's solvency, however. Currently, the business does not have sufficient liquid assets to satisfy this obligation. In fact, the company's working capital position is actually negative by $25,880 ($93,100 of current assets minus $118,980 of current liabilities). Likewise, its current ratio is only 0.78:1 ($93,100 of current assets divided by $118,980 of current liabilities). However, if the business can continue to generate at least $5,000 of positive operating cash flows each month, remaining solvent should not pose a serious issue. g.
There is nothing at all unethical about Patty Driver (a founding stockholder) maintaining the accounting records for Susquehanna Equipment Rentals. In most businesses, the accounting records are maintained either by owners or employees, none of whom are “independent” of the organization. The concept of independence refers to auditing financial statements, where the auditor has to make an independent evaluation of the statements’ “fairness.” Independence does not apply to the routine maintenance of accounting records.
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