On December 1, Year 1, John and Patty Driver formed a corporation called Susqueh

Question

On December 1, Year 1, 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.

The corporation performs adjusting entries monthly. Closing entries are performed annually on December 31. During December, the corporation entered into the following transactions.

Data for Adjusting Entries

The advance payment of rent on December 1 covered a period of three months.

The annual interest rate on the note payable to Rent-It is 6 percent.

The rental equipment is being depreciated by the straight-line method over a period of eight years.

Office supplies on hand at December 31 are estimated at $720.

During December, the company earned $4,440 of the rental fees paid in advance by McNamer Construction Company on December 8.

As of December 31, six days’ rent on the backhoe rented to Mission Landscaping on December 26 has been earned.

Salaries earned by employees since the last payroll date (December 26) amounted to $1,680 at month-end.

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 Year 2.

Complete the 10-column worksheet for the year ended December 31. (For accounts where multiple Adjustments are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

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 Salaries Payable Depreciation Expense Dividends Payable Interest Expense Unearned Rental Fees Income Taxes Expense Income Taxes Payable

Explanation / Answer

Journal Entries

Adjustment Entries:

Note:

1. Interest for 1 month = 120,000*.06*1/12= 600

2. Depreciation for 1 month on SLM Basis= (288,000/8) * 1/12= 36,000/12 = 3,000

3. Dividend on 1 share = .12$, thus total dividend = 0.12*20,000= 2,400

4. Calculation of Income Tax Payable

*Dividend is paid out of retained earnings and is not considered for computation of profit and income tax.

Date Particulars Debit Credit Dec 1 Cash A/c Dr. 240,000 To Capital Stock A/c 240,000 Dec 1 Rental Equipment A/c Dr. 288,000 To Cash A/c 168,000 To Notes Payable 120,000 Dec 1 Rent Expense A/c Dr. 14,400 To Cash A/c 14,400 Dec 4 Office Supplies A/c Dr. 1,200 To Accounts Payable A/c 1,200 Dec 8 Cash A/c Dr. 9,600 To Unearned Rental Fees A/c 9,600 Dec 12 Salaries Expense A/c 6,240 To Cash A/c 6,240 Dec 15 Cash A/c Dr. 14,400 Accounts Receivable A/c Dr. 7,200 To Rental Fees Earned 21,600 Dec 17 Maintenance Expense A/c Dr. 720 To Accounts Payable 720 Dec 23 Cash A/c Dr. 2,400 To Accounts Receivable 2,400 Dec 26 Salaries Expense A/c Dr 6,240 To Cash A/c 6,240 Dec 27 Accounts Payable A/c Dr. 720 To Cash A/c 720 Dec 28 Retained Earnings A/c Dr. 2,400 To Dividend Payable A/c 2,400 Dec 29 No entry is required as this is a contingent liability Dec 29 Unexpired Insurance A/c Dr. 11,520 To Cash A/c 11,520 Dec 31 Utilities Expense A/c Dr. 840 To Accounts Payable 840 Dec 31 Cash A/c Dr 18,720 Accounts Receivable A/c Dr. 5,280 To Rental Fees Earned 24,000

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