5 to 6 hours
Strong
COMPREHENSIVE PROBLEM 1
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.
SUSQUEHANNA EQUIPMENT RENTALS
5 to 6 hours, Strong
Dec 1 Cash 240,000
Capital Stock 240,000
1 288,000
1 14,400
Cash 14,400
4 1,200
Accounts Payable 1,200
8 Cash 9,600
Unearned Rental Fees 9,600
30 days.
Purchased supplies on account; payment due in
Received advance payment for equipment rental
Office Supplies
12 6,240
Cash 6,240
15 Cash 14,400
Rental Fees Earned 21,600
17 720
Accounts Payable 720
To record purchase of repair parts on account
To record rental fees earned in first 15 days of
December,
Maintenance Expense
Accounts Receivable
23 Cash 2,400
Accounts Receivable 2,400
26
COMPREHENSIVE PROBLEM 1
a.
Year 1
General Journal
December Daily Transactions
Salaries Expense
(No entry required to record rental of backhoe.)
Owner invested cash in the business.
Prepaid Rent
Realty.
Paid three months’ rent in advance to Shapiro
Rental Equipment
Collection of an accounts receivable.
Paid salaries for first two weeks in December.
from Earth Movers, Inc.; payment due in 10 days.
by McNamer Construction Company.
Notes Payable 120,000
Purchased equipment from Rent-it. Note payable
is due in one year.
Dec 26 6,240
Cash 6,240
31 840
Accounts Payable 840
31 18,720
of December.
Accounts Receivable
Cash
To record rental fees earned in the second half
December Daily Transactions
Utilities Expense
Utilities for December; payment due in 30 days.
COMPREHENSIVE PROBLEM 1
Salaries Expense
(continued)
a.
Year 1
Paid biweekly payroll.
General Journal
27 720
28 2,400
Dividends Payable 2,400
29
29 11,520
(No journal entry required to record lawsuit.)
Declared a dividend of 12 cents per share payable
Accounts Payable
Paid account payable to Earth Movers, Inc.
Unexpired Insurance
Purchased 12-month liability policy, effective
January 1, Year 2.
on January 15, Year 2.
Dec 31 4,800
Prepaid Rent 4,800
31 3,000
3,000
31 480
Office Supplies 480
31 4,440
Rental Fees Earned 4,440
31 1,800
Rental Fees Earned 1,800
on backhoe rental (6 days x $300 per day).
To record fees earned from Mission Landscaping
Unearned Rental Fees
To record portion of advance payment by McNamer
Accounts Receivable
Construction Co. earned during December.
31 1,680
Salaries Payable 1,680
31 10,896
Income Taxes Payable 10,896
Income Taxes Expense
To record income taxes for December [($51,840 –
x 40%].
Rent Expense
Office Supplies Expense
To recognize rent expense for December.
Accumulated Depreciation: Rental Equip.
Depreciation for December ($288,000 ÷ 8 years x 1/12
Depreciation Expense
= $3,000).
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
(Adjusting Entries)
General Journal
(continued)
a.
Year 1
To record office supplies used during the month.
($1,200 – $720 = $480)
Salaries Expense
To record accrued salaries payable at month-end.
31 600
Interest Payable 600
Interest on note payable to Rent-It ($120,000 x 6%
x 1/12).
Interest Expense
a.
Debit Credit Balance
Dec 1 240,000 240,000
1 168,000 72,000
1 14,400 57,600
8 9,600 67,200
Debit Credit Balance
Dec 15 7,200 7,200
23 2,400 4,800
31 5,280 10,080
31 1,800 11,880
Debit Credit Balance
Dec 1 14,400 14,400
31 4,800 9,600
Debit Credit Balance
Dec 29 11,520 11,520
Debit Credit Balance
Dec 4 1,200 1,200
31 480 720
Date
Explanation
Date
Explanation
Date
Explanation
Date
Explanation
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
Cash
(continued)
Date
Explanation
Prepaid Rent
Accounts Receivable
12 6,240 60,960
15 14,400 75,360
23 2,400 77,760
26 6,240 71,520
27 720 70,800
29 11,520 59,280
31 18,720 78,000
a.
Debit Credit Balance
Dec 1 288,000 288,000
Debit Credit Balance
Dec 1 120,000 120,000
Debit Credit Balance
Dec 4 1,200 1,200
Debit Credit Balance
Dec 31 600 600
Explanation
Date
Explanation
Date
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
Rental Equipment
Date
(continued)
Explanation
Explanation
Notes Payable
Date
Debit Credit Balance
Dec 31 3,000 3,000
Date
Explanation
a.
Debit Credit Balance
Dec 31 1,680 1,680
Debit Credit Balance
Dec 8 9,600 9,600
31 4,440 5,160
Debit Credit Balance
Dec 31 10,896 10,896
Debit Credit Balance
Dec 1 240,000 240,000
Explanation
Date
Explanation
Date
Date
Explanation
Unearned Rental Fees
Date
Explanation
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
Salaries Payable
(continued)
Debit Credit Balance
Dec 28 2,400 2,400
Date
Explanation
a. & d.
Debit Credit Balance
Dec 31 16,344 16,344
31 2,400 13,944
Debit Credit Balance
Dec 15 21,600 21,600
31 24,000 45,600
31 4,440 50,040
31 1,800 51,840
31 51,840 0
Debit Credit Balance
Dec 12 6,240 6,240
26 6,240 12,480
31 1,680 14,160
31 14,160 0
Explanation
Date
To close
Explanation
COMPREHENSIVE PROBLEM 1
Retained Earnings
Date
Income, Year 1
(continued)
To close
Explanation
Dividends
Rental Fees Earned
Date
Debit Credit Balance
Dec 28 2,400 2,400
31 2,400 0
Debit Credit Balance
Dec 31 51,840 51,840
31 35,496 16,344
31 16,344 0
To close expense accounts
To close
Explanation
To close revenue accounts
Date
Explanation
To close
Date
a. & d.
Debit Credit Balance
Dec 17 720 720
30 720 0
Debit Credit Balance
Dec 31 4,800 4,800
31 4,800 0
Debit Credit Balance
Dec 31 480 480
31 480 0
To close
Date
Explanation
Date
To close
Explanation
Rent Expense
Date
To close
Explanation
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
Maintenance Expense
(continued)
Debit Credit Balance
Dec 31 840 840
31 840 0
Date
Explanation
To close
a. & d.
Debit Credit Balance
Dec 31 3,000 3,000
31 3,000 0
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
Depreciation Expense
(continued)
Date
To close
Explanation
Debit Credit Balance
Dec 31 600 600
31 600 0
Debit Credit Balance
Dec 31 10,896 10,896
31 10,896 0
To close
Date
Explanation
To close
Date
Explanation
SUSQUEHANNA EQUIPMENT RENTALS
Worksheet
December 31, Year 1
a.
Debit Credit Debit Credit Debit Credit Debit Credit
Balance sheet accounts :
Cash 78,000$ 78,000$ 78,000$
Accounts receivable 10,080 (f) 1,800$ 11,880 11,880
Prepaid rent 14,400 (a) 4,800$ 9,600 9,600
Unexpired insurance 11,520 11,520 11,520
Office supplies 1,200 (d) 480 720 720
Accum. Dep.: rental equip. (c) 3,000 3,000 3,000
Salaries payable (g) 1,680 1,680 1,680
Income taxes payable (h) 10,896 10,896 10,896
Rental fees earned 45,600 (e) 4,440 51,840 51,840$
Salaries expense 12,480 (g) 1,680 14,160 14,160$
Maintenance expense 720 720 720
Rent expense (a) 4,800 4,800 4,800
Interest expense (b) 600 600 600
Depreciation expense (c) 3,000 3,000 3,000
Office supplies expense (d) 480 480 480
Income taxes expense (h) 10,896 10,896 10,896
27,696$ 27,696$ 437,616$ 437,616$ 35,496 51,840 402,120 385,776
Net income 16,344 16,344
Totals $ 51,840 $ 51,840 $ 402,120 $ 402,120
* Adjustments
Debit
Credit
Trial Balance
RENTALS (continued)
COMPREHENSIVE PROBLEM 1
Adjustments*
Adjusted Trial Balance
Income Statement
Balance Sheet
SUSQUEHANNA EQUIPMENT
Rental equipment 288,000 288,000 288,000
Notes payable 120,000$ 120,000$ 120,000$
Accounts payable 2,040 2,040 2,040
Unearned rental fees 9,600 (e) 4,440 5,160 5,160
Dividends payable 2,400 2,400 2,400
Capital stock 240,000 240,000 240,000
Retained earnings –
Dividends 2,400 2,400 2,400
Interest payable (b) 600 600 600
b.
Rental fees earned 51,840$
$ 14,160
720
$0
16,344
$ 16,344
2,400
Retained earnings, December 31, Year 1
Less: Dividends
SUSQUEHANNA EQUIPMENT RENTALS
Statement of Retained Earnings
Subtotal
Retained earnings, December 1, Year 1
Net income
For the Year Ended December 31, Year 1
Income Statement
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
(continued)
SUSQUEHANNA EQUIPMENT RENTALS
Revenue:
For the Year Ended December 31, Year 1
Expenses
Salaries expense
Maintenance expense
4,800
480
3,000
600 24,600
Income taxes expense @ 40%
Depreciation expense
Interest expense
Office supplies expense
Utilities expense
Rent expense
b.
78,000$
120,000$
2,040
600
1,680
2,400
5,160
Unearned rental fees
Capital stock
Stockholders’ equity:
c.
Notes to the financial statements:
Dividends payable
Liabilities & Stockholders’ Equity
Liabilities:
Note 3—Pending litigation
The Company has been named as a co-defendant in a $30,000 personal injury lawsuit. The
extent of legal and financial responsibility, if any, cannot be determined at this time.
Year 2. The maturity value of this note, including interest, will amount to $127,200.
Note 1—Depreciation policies
Note 2—Maturity dates of liabilities
Depreciation expense in the financial statements is computed by the straight-line method.
The estimated useful life of the rental equipment is 8 years.
Assets
COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS
SUSQUEHANNA EQUIPMENT RENTALS
Balance Sheet
December 31, Year 1
(continued)
Cash
Notes payable
Accounts payable
Interest payable
Salaries payable
11,880
9,600
396,720$
Prepaid rent
Unexpired insurance
Office supplies
Rental equipment
Accounts Receivable
Dec 31 51,840
Income Summary 51,840
31 16,344
Retained Earnings 16,344
31 2,400
Dividends 2,400
e.
$ 78,000
11,880
9,600
11,520
720
288,000
$ 3,000
120,000
2,040
600
1,680
5,160
10,896
240,000
13,944
$ 399,720 $ 399,720
Unearned rental fees
Income taxes payable
Retained earnings
Capital stock
Totals
Salaries payable
Accounts payable
Notes payable
Interest payable
Accumulated depreciation: rental equipment
Rental equipment
Accounts receivable
Prepaid rent
Unexpired insurance
Office supplies
Cash
SUSQUEHANNA EQUIPMENT RENTALS
After-Closing Trial Balance
December 31, Year 1
COMPREHENSIVE PROBLEM 1
d.
Year 1
To close the revenue account.
(Closing Entries)
Rent Fees Earned
General Journal
Retained Earnings
To close the Dividends account.
To close the Income Summary account.
Income Summary
31 35,496
Maintenance Expense 720
Utilities Expense 840
Office Supplies Expense 480
Depreciation Expense 3,000
Interest Expense 600
Income Taxes Expense 10,896
Income Summary
To close the expense accounts.
f.
g.
The concept of independence refers to auditing financial statements, where the auditor has
It does not appear that the company faces any immediate solvency problems. It did start
COMPREHENSIVE PROBLEM 1
There is nothing at all unethical about Patty Driver (a founding stockholder) maintaining
the accounting records for Susquehanna Equipment Rentals. In most businesses, the
with $240,000 cash, but in its first transaction the company spent $168,000 on equipment,
leaving only $72,000 cash to begin operations. This amount had increased to $78,000 by the