Tonys Equipment Rental Inc. (TERI)

On September 1, 2022, Tony Ferria organized a business called Tonys Equipment Rental Inc. (TERI) for the purpose of operating an equipment rental yard. The new business 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.

TERI uses the following chart of accounts:

Assets: Cash, Accounts Receivable, Prepaid Rent, Office Supplies, Rental Equipment, Accumulated depreciation: Rental Equipment

Liabilities: Notes Payable, Accounts Payable, Interest Payable, Salaries Payable, Unearned Rental Fees

Shareholders Equity: Common Shares, Retained Earnings, Dividends

Revenues: Rental Fees Earned

Expenses: Salaries Expense, Maintenance Expense, Utilities Expense, Rent Expense, Office Supplies Expense, Depreciation Expense, Interest Expense

In September, the company entered the following transactions:

Sept. 1 Issued common shares to Tony Ferria and other investors in exchange for $100,000 cash.

Sept 1 Paid $9,000 to Wellington Realty as three months advance rent on the rental yard and office formerly occupied by Rent-It

Sept 1 Purchased for $180,000 all the equipment formerly owned by Rent-It. Paid $70,000 cash and issued a one-year note payable for $110,000, plus interest at the annual rate of 9%. This rental equipment is estimated to have a 10-year useful life.

Sept 4 Purchased office supplies on account from Modern Office Co., $1,630. Payment due in 30 days. (These supplies are expected to last for several months.)

Sept 8 Received $10,000 cash from McFadden Construction Co. as advance payment for equipment rental.

Sept 12 Paid salaries for the first two weeks in September, $3,600.

Sept 15 Excluding the McFadden advance, equipment rental fees earned during the first 15 days of September amounted to $6,100, of which $5,300 was received in cash and $800 was an account receivable.

Sept 17 Purchased on account from Earth Movers, Inc., $340 in parts needed to repair a rental tractor. Payment is due in 10 days.

Sept 23 Collected $210 of the accounts receivable recorded on September 15.

Sept 26 Rented a backhoe to Mission Landscaping at a price of $100 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two or three weeks.

Sept 26 Paid biweekly salaries, $3,600.

Sept 27 Paid the account payable to Earth Movers, Inc., $340.

Sept 28 Paid dividends of $2,000 cash.

Sept 30 Received a bill for utilities expense for the month of September, $270. Payment is due in 30 days.

Sept 30 Cash received from equipment rental during the second half of September, $6,450.

The information available on September 30 is as follows: the office supplies on hand are estimated at $1,100; $4,840 of the advance payment from McFadden Construction Co. has been earned; salaries earned by employees since the last payroll are $900.

Instructions:

Prepare journal entries for the above transactions in September and post the transactions to the ledger, using T-accounts and adding any new accounts which you need. You may omit narratives to the journal entries.

Prepare adjusting journal entries and post the adjustments to the T-accounts, adding any new accounts which you need. Note that some of the adjusting entries can be derived from the information provided in the various transactions from September 1 to September 30, in addition to the information available on September 30.

Prepare a statement of earnings (income statement) for the month of September in good form.

Prepare a statement of retained earnings for the month of September in good form.

Prepare a classified statement of financial position (balance sheet) as of September 30 in good form.

Prepare closing entries as of September 30.

Questions to Answer:

1.What is the impact on financial statements (are income, assets, liabilities overstated , understated or not affected) if the equipment is estimated (on September 1) to have a useful life of 20 years instead of 10 years ?

2.Are there any ethical implications in lengthening the useful life of the asset ? List the stakeholders who could be affected by such a change and briefly discuss how they could be affected ?