A COMPREHENSIVE ACCOUNTING CYCLE PROBLEM

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 of its first year of operations, the corporation entered into

the following transactions.Data for Adjusting Entries in Year $1$

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

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

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

Any salvage value at the end of its useful life is expected to be negligible and immaterial.

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

e$.$ During December, the company earned $$4,440$ of the rental fees paid in advance by McNamer

Construction Company on December $8.$

f$.$ As of December $31,$ six days' rent on the backhoe rented to Mission Landscaping on December $26$

has been earned.

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

month$-$end.

h$.$ 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 $2.$Instructions

a$.$ Perform the following steps of the accounting cycle for the month of December, Year $1.$

Journalize the December transactions. Do not record adjusting entries at this point.

Post the December transactions to the appropriate ledger accounts.

Prepare the unadjusted trial balance columns of a $10-$column worksheet for the year ended

December $31.$

Prepare the necessary adjusting entries on December $31.$

Post the December adjusting entries to the appropriate ledger accounts.

Complete the $10-$column worksheet for the year ended December $31.$

b$.$ Prepare an income statement and statement of retained earnings for the year ended

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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?