COMPREHENSIVE PROBLEM 1 Mama & Papas Gardening Center, Inc. On December 1, 2012, Jo Shmo and Frank Shmo formed a corporation called Mama & Papas Gardening Center, Inc. The new corporation was able to begin operations immediately because they purchased an already existing gardening business. The newly formed company uses the following accounts: 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 Dividends Income Summary Rental Fees Earned Salaries Expense Maintenance Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense Interest Expense Income Taxes Expense The corporation performs adjusting entries monthly. Closing entries are performed annually on December 31 of every year. During the month of December 2012, the corporation entered into the following transactions: Dec. 1 Issued to Jo and Frank Shmo 30,000 shares of capital stock in exchange for a total of $400,000 cash. Dec. 1 Purchased rental equipment from Smith Rentals, Inc. for the business for $300,000 by paying $100,000 cash and issued a one-year note payable for the remainder of the balance. The note, plus all 12-month of accrued interest, are due November 30, 1013. Dec. 1 Paid $15,000 to Smith Realty as three months advance rent on the rental yard Dec. 5 Purchased office supplies on account from a local supplies store. The supplies cost $1,000 and payment is due in 30 days. These supplies are expected to last several months debit the Office Supplies asset account. Dec. 8 Received $10,000 cash as an advance payment for equipment rentals from Alexis Construction Company. (Credit Unearned Rental Fees) Dec.### Paid salaries for the first two weeks in December, $8,500. Dec.### Excluding the advance received on December 8th, equipment rental fees earned during the first 15 days of December amounted to $19,000, of which $15,000 was received in cash. Dec. 17 Purchased on account from Dirt Movers Inc. $800 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 2 weeks. Dec.### Collected $2,000 of the accounts receivable recorded on December 15th. Dec.### Rented a backhoe to Levy Landscaping at a price of $300 per day, to be paid when the backhoe is returned. Levy Landscaping expects to keep the backhoe for about 2-3 weeks. Dec.### Dec. 27 Dec.### Dec.### Paid biweekly salaries, $8,500. Paid the account payable to Dirt Movers Inc., $800. Declared a cash dividend of 20 cents per share, payable on January 20, 2013. Mama & Papas Gardening Center Inc., along with Levy Landscaping, were named as co-defendant in a $40,000 lawsuit filed on behalf of Christopher Robin. Levy Landscaping had left the rented backhoe on their fenced in property. Christopher Robin, a the son of an employee at Levy Landscaping was at work with his father and accidently fell and broke his arm as he tripped over the backhoe. The extent of the companys legal and financial responsibility for this accident, if any, cannot be determined at this time. (NOTE: This event does not require a journal entry at this time, but may require disclosure in the notes accompanying the statements.) Dec.### Purchased a 12-month liability insurance policy for $12,000. This policy protects the company against liability for injuries and property damage caused by its equipment. However, the policy goes into effect on January 1, 2013 and offers to protection against the claim filed for Christopher Robin. Dec.### Received a bill from the utility company for the month of December, payable in 30 days, $750. Dec.### Equipment rental fees earned during the second half of December 2012 amounted to $ 24,000, of which $18,500 was received in cash. Data for Adjusting Entries a. b. c. d. e. The advance payment of rent on December 1 covered a period of 3 months. The annual interest rate on the note payable to Smith Rentals, Inc., is 9 percent. The rental equipment is being depreciated using the straight-line method over a period of ten years. Office supplies on hand on December 31st amounted to $400. During the month of December, the company earned $2,650 of the rental fees paid in advance by Alexis Construction Company. As of December 31, six days rent on the backhoe rented to Levy Landscaping on December 26th has been f. earned. Salaries earned by employees since the last payroll period (December 26th) amounted to 3,250 at monthg. end. It is estimated that the company is subject to a combined federal and state income tax rate of 40% of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable the following year. h. a. Perform the following steps of the accounting cycle for the month of December Journalize the December transactions. Do not record adjusting entries at 1. this point. 2. Post the December transactions to the appropriate ledger accounts. Prepare the unadjusted trial balances columns of a 10-column 3. worksheet for the year ended December 31. 4. Prepare the necessary adjusting entries for December. Post the December adjusting entries to the appropriate ledger accounts. 5. Complete the 10-column worksheet for the year ended December 31st. 6. Prepare an income statement and statement of retained earnings for the year ended December 31, b. and a balance sheet. Prepare required disclosures to accompany the December 31 financial statements. Your solution c. should include a separate note 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 to ledger accounts. e. Prepare an after-closing trial balance as of December 31. During December, this companys cash balance has fallen from $400,000 to roughly $30,000. Does it appear that the company is headed for insolvency in the near future? How about net income? Is it sufficient to sustain its operations? Should the company be declaring dividends at such a rate? Explain your reasoning. f. Would it be ethical for Frank Shmo to maintain the accounting records for this company, or must they g. be maintained by someone who is independent of the organization? COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. 2012 Dec 1 Cash General Journal December Daily Transactions Capital Stock Owner invested cash in the business. Dec 1 Dec 1 Dec 5 Dec 8 Dec 13 Dec 15 Dec 17 Dec 22 Dec 26 Dec 26 Dec 27 Dec 28 Dec 29 Dec 29 Dec 31 Dec 31 400,000 400,000 COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. 2012 Dec 31 31 31 31 31 31 31 31 General Journal (Adjusting Entries) COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. Date Dec 1 Explanation Date Explanation Date Cash Debit 400,000 Credit Balance 400,000 Accounts Receivable Debit Credit Balance Explanation Prepaid Rent Debit Credit Balance Date Explanation Unexpired Insurance Debit Credit Balance Date Explanation Office Supplies Debit Credit Balance COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. Rental Equipment Debit Date Explanation Credit Balance Date Explanation Accumulated Depreciation: Rental Equipment Debit Credit Balance Date Explanation Notes Payable Debit Credit Balance Date Explanation Accounts Payable Debit Credit Balance Date Explanation Interest Payable Debit Credit Balance COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. Date Explanation Salaries Payable Debit Credit Balance Date Explanation Dividends Payable Debit Credit Balance Date Explanation Unearned Rental Fees Debit Credit Balance Date Explanation Income Taxes Payable Debit Credit Balance Date Dec 1 Explanation Capital Stock Debit Credit 400,000 Balance 400,000 COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. & d. Date Explanation Retained Earnings Debit Credit Balance Date Explanation Dividends Debit Credit Balance Date Explanation Income Summary Debit Credit Balance Date Explanation Rental Fees Earned Debit Credit Balance Date Explanation Salaries Expense Debit Credit Balance COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. & d. Date Explanation Maintenance Expense Debit Credit Balance Date Explanation Utilities Expense Debit Credit Balance Date Explanation Rent Expense Debit Credit Balance Date Explanation Office Supplies Expense Debit Credit Balance COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. a. & d. Date Explanation Depreciation Expense Debit Credit Balance Date Explanation Interest Expense Debit Credit Balance Date Explanation Income Taxes Expense Debit Credit Balance MAMA AND PAPAs GARDENDING CENTER, INC. Worksheet December 31, 2012 a. Unadjusted 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 $ 300,700 7,500 15,000 12,000 1,000 300,000 Adjustments* Debit Credit Adjusted Trial Balance Debit Credit Income Statement Debit Credit Balance Sheet Debit Credit $ $ $ $ $ $ (f) (a) (d) $ 200,000 1,750 10,000 6,000 400,000 $ $ $ $ $ $ $ $ $ (e) 6,000 43,000 $ (b) (c) (g) (h) 17,000 800 750 660,750 (e) (f) $ (g) $ $ $ (a) (b) (c) (d) $ $ $ $ $ (h) $ $ 660,750 Rent expense Interest expense Depreciation expense Office supplies expense Income taxes expense $ Net income Totals * Adjustments (a) December rent expense ($15,000 3). (b) December interest expense ($200,000 x 9% x 1/12). (c) December depreciation expense ($300,000 120 months). (d) Office supplies used in December ($1,000 $400). $ $ $ $ (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. $ $ $ COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. b. MAMA AND PAPAs GARDENDING CENTER, INC. Income Statement For the Year Ended December 31, 2012 Revenue: $ $ Expenses $ Income before income taxes expense Net income $ MAMA AND PAPAs GARDENDING CENTER, INC. Statement of Retained Earnings For the Year Ended December 31, 2012 Retained earnings, December 1, 2012 $0 $0 Subtotal Retained earnings, December 31, 2012 $ COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. b. MAMA AND PAPAs GARDENDING CENTER, INC. Balance Sheet December 31, 2012 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. Notes to the financial statements: Note 1Depreciation policies Note 2Maturity dates of liabilities Note 3Pending litigation $ $ $ $ $ $ $ $ $ $ COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. d. General Journal (Closing Entries) 2012 Dec 31 31 31 31 e. MAMA AND PAPAs GARDENDING CENTER, INC. After-Closing Trial Balance December 31, 2012 $ 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 $ $ COMPREHENSIVE PROBLEM 1 MAMA AND PAPAs GARDENDING CENTER, INC. f. g.