On December 1, Year 1, Wayne and Susan Li formed a corporation called French Broad 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:

Cash

Accounts Receivable

Prepaid Rent

Prepaid 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. During December of its first year of operations, the corporation entered into the following transactions:

December 1 Issued to Wayne and Susan Li 20,000 shares of capital stock in exchange for a total of $240,000 cash.

December 1 Purchased for $288,000 all of the equipment formerly owned by Rent-It. Paid $168,000 cash and issued a one-year note payable for $120,000. The note, plus all 12 months of accrued interest, are due November 30, Year 2.

December 1 Paid $14,400 to Shapiro Realty as three months’ advance rent on the rental yard and office formerly occupied by Rent-It.

December 4 Purchased office supplies on account from Modern Office Company, $1,200. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)

December 8 Received $9,600 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.)

December 12 Paid salaries of $6,240 for the first two weeks in December.

December 15 Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $21,600, of which $14,400 was received in cash.

December 17 Purchased on account from Earth Movers, Incorporated, $720 in parts needed to perform basic maintenance on a rental tractor. Payment is due in 10 days.

December 23 Collected $2,400 of the accounts receivable recorded on December 15.

December 26 Rented a backhoe to Mission Landscaping at a price of $300 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two or three weeks.

December 26 Paid biweekly salaries, $6,240.

December 27 Paid the account payable to Earth Movers, Incorporated, $720.

December 28 Declared a dividend of 12 cents per share, payable on January 15, Year 2. (Hint: Credit the Dividends Payable account.)

December 29 French Broad Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co-defendant in a $30,000 lawsuit filed on behalf of Kevin Davenport. Mission Landscaping had left the rented backhoe in a fenced construction site owned by Collier Construction. After working hours on December 26, Davenport had climbed the fence to play on parked construction equipment. While playing on the backhoe, he fell and broke his arm. The extent of the company’s 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.)

December 29 Purchased a 12-month public liability insurance policy for $11,520. 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, Year 2, and affords no coverage for the injuries sustained by Kevin Davenport on December 26.

December 31 Received a bill from Universal Utilities for the month of December, $840. Payment is due in 30 days.

December 31 Equipment rental fees earned during the second half of December amounted to $24,000, of which $18,720 was received in cash.

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.

Required:

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

1-b. Prepare the necessary adjusting entries for December.

1-c. Prepare closing entries and post to ledger accounts.

Required:

Prepare an income statement for the year ended December 31.

Required:

Prepare a statement of retained earnings for the year ended December 31.

Required:

Prepare a balance sheet (in report form) as of December 31.

Note: Amounts to be deducted should be indicated by a minus sign.