A COMPREHENSIVE ACCOUNTING CYCLE PROBLEM Oa December 1. Ycar 1. John and Pary Driver formed a coppraticn called Sequechanna Equipment Rentals. The ocw cogpeasion was able to begin operations imniediately by frorchaning the assets and taiting evet the lecetios of Rent-lt, an oq-ifment fratal company that ully ce December 31. During December of its fins year of uperstions, the corpocitsen estered ittol the followiag transactions. Dec, 1 Isrued io fohn aed Patty Driver 20000 shares of cupitail wock in ewthan g foes total of $240,000 cath Dec. 1 Perchaved for $288,000 all of the equipment formedy owned by Rreth.ti, Fust S1 0.000 cast and iswoed a 1-year note payable for 5120000 . The naic, plus all 12 mantis of accrued interest, are due November 30, Year 2 . Deci 1 Paid 514,400 to Shapiro Realyy as three moneth' advance rent en the rental yard and office formerly occupicd by Rees-1. Dee. 4 Porchasal office supplies an asconant from Modern Olico C0., 51,200. Payment due in 30 digs. (These supptes are expected to last for several mouths, debit the OUlice Suppiles asset accomint.) Dec. 8 Received 59,600 cash as ajvance paymeat on equipment reasal from MeNamer Cocsaruction Cotnpamy. (Crodit Unciened Rental Fhec) Dec. 12 Paid salaries af 56,240 fot the fint two wecks in Docember. Dec 15 Exclading the McNamer acvance, equipment rental fees camed during the first 15 dyys of December amounted to 521,600 , of which $14,400 was received in cath: Dee. 17 Purchased on account from Earth Movers, Isc., $720 in parts needed to perform bacic maintenance on a rental tractor. Paymeit is doc in 10 days. Dec. 23 Collected 52.400 of the accounts receivable reconded on December 15. Chapter 5 The Accounting Cyele: Reporiting Financlai Rosults Dee, 26 Rented a backhoe to Mission Landscaping at a price of $300 per day, to be paid when the backboe is returned. Mission Landseajing expects to keep the backboc for about two or three wecks. Dec, 26 Paid biweekly salaries, 56,240 . Dec. 27 Paid the account payable to Earth Movers, Inc, 5720. Dec. 28 Declared a dividend of 12 cents per share, payable on Janwary 15, Year 2. Dec. 29 Susquehanna Equipment Rentals was named, along with Mission Landscaping and Collier Coostruction, as a co-defendans in a $30,000 lawsuit filed on behalf of Kevin Dawenport. Mission Landseaping had left the rented backhoe in a. fenced construction slie cowned by Cotlier Construction. After workifig hours on December 26, Davenpont had climbed the fence to piay on parked construction equipmeat. Whille playing on the backhoc, he fell and broke his arm. The extent of the company's legal and financial respossibility for this accident, if any, cannos be determined at this time, (Note: This event does nor require a fournal entry as this time, bet may require disclosure ia noces accompanying the Matements.] Dee. 29 Purcbased a 12-month pablic liability insurance policy for $11,520. This policy protects the company against liability for injuries and property damage caused by its equipmeat. However, the policy goes imo effect on Jasaary 1, Year 2, and affords no coverage for the injuries sustained by Kevin Dsvenport on December 26 . Dec, 31 Received a bill from Universal Utilities for the moeth of December, 5840 . Paymeat is due in 30 days. Dec. 31 Equipment rental fees camed during the second half of December umoanted to $24,000, of which $18,720 was received in eash. Data for Adjusting Entries in Year 1 a. The advance pryment of rent on December I covered a period of eluee months b. The anmual interest rate on the note payable to Rent-lt is 6 percent. c. The reatal equipment is being depreciaied by the straight-line nethod over a period of eight yearw. Any salvage value at the end of its useful life is expected to be negligible and immaterial. d. Office supplies on hind at December 31 are estimated as 5720 . e. During December, the cominasy earned $4,440 of the reatal foes paid in advance by MeNamer Construction Campany eo December 8 . f. As of December 31, six daya' rent on the backthoc rented to Mission Landserging on December 26 has been carned. g. Sataries earned by employees since the last pryroll dato (Detember 26) atroonied 60$1.650 at month-end. h. It is estimated that the company is sabject to a cumbined federal aed stale income tax tats of teees). These taxes will be payahlo in Year 2 . Instructions a. Perfarm the following steps of the accounting cycle for the mosit of December, Year 1 . 1. Joumalize the Decernber transactions. Do nos recoed adjusting encries at this polett. 2. Post the December transactions to the appropriate ledger accounts. 3. Prepare the unadjusied inial balance columiss of a 10 -colums workshect for the year ended December 31. 4. Prepare the necessary adjusting entries on Decenter 31 . 5. Port the Decenber adjusting entries to the uppropriate ledget accoums. 6. Complete the 10-cotumn workheet for the year ended December 31. b. Prepare an income statement and statement of retained earnings for the year ended December 31 , and a balance sheet as of December 31, Year 1 . c. Prepare required disclosures to accompany the financial statements dated December 31, Year 1. Your disclosures should include separate write-ups addressing each of the following areas: (1) depreciation policy, (2) maturity dates of major liabilities, and (3) potential liability due to pending litigation. d. Prepare closing entries and post them to ledger accounts, e. Prepare an after-closing trial balance as of December 31, Year 1 . f. During December, the company's cash balance fell from $240,000 to $78,000. Does this imply that the business is headed for insolvency in the near future? Explain your reasoning. g. 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