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Comp Problem 241: MMangels

a.
General Journal December Daily Transactions 2013 Dec 1 Cash Share Capital Owner invested cash in the business. 1 Rental Equipment Cash Notes Payable Purchased equipment from Rent-it. Note payable is due in one year. 1 Prepaid Rent Cash Paid three months' rent in advance to Shapiro Realty. 4 Office Supplies Accounts Payable Purchased supplies on account; payment due in 30 days. 8 Cash Unearned Rental Fees Received advance payment for equipment rental by McNamer Construction Company. 12 Salaries Expense Cash Paid salaries for first two weeks in December. 15 Cash Accounts Receivable Rental Fees Earned To record rental fees earned in first 15 days of December, 17 Maintenance Expense Accounts Payable To record purchase of repair parts on account from Earth Movers Limited; payment due in 10 days. 23 Cash Accounts Receivable Collection of an accounts receivable. 23 (No entry required to record rental of backhoe.) 5,200 5,200 240,000 140,000 100,000 200,000 200,000

12,000 12,000

1,000 1,000

8,000 8,000

12,000 6,000 18,000

600 600

2,000 2,000

Mackenzie Mangels

Comp Problem 241: MMangels (continued)


a.
General Journal December Daily Transactions 2013 Dec 26 Salaries Expense Cash Paid biweekly payroll. 27 Accounts Payable Cash Paid account payable to Earth Movers Limited 28 Dividends Dividends Payable Declared a dividend of 10 cents per share payable on January 15, 2014. 29 (No journal entry required to record lawsuit.) 29 Unexpired Insurance Cash Purchased 12-month liability policy, effective January 1, 2014. 31 Utilities Expense Accounts Payable Utilities for December; payment due in 30 days. 31 Cash Accounts Receivable Rental Fees Earned To record rental fees earned in the second half of December. 9,600 9,600 5,200 5,200

600 600

2,000 2,000

700 700

15,600 4,400 20,000

Mackenzie Mangels(p.2)

Comp Problem 241: MMangels (continued)


a.
General Journal (Adjusting Entries) 2013 Dec 31 Rent Expense Prepaid Rent To recognize rent expense for December. 31 Interest Expense Interest Payable Interest on note payable to Rent-It ($100,000 x 6% x 1/12). 31 Depreciation Expense Accumulated Depreciation: Rental Equip.
Depreciation for December ($240,000 8 years x 1/12

4,000 4,000

500 500

2,500 2,500

= $2,500). 31 Office Supplies Expense Office Supplies To record office supplies used during the month. ($1,000 - $600 = $400) 31 Unearned Rental Fees Rental Fees Earned To record portion of advance payment by McNamer Construction Co. earned during December. 31 Accounts Receivable Rental Fees Earned To record fees earned from Mission Landscaping on backhoe rental (6 days x $250 per day). 31 Salaries Expense Salaries Payable To record accrued salaries payable at month-end. 31 Income Taxes Expense Income Taxes Payable To record income taxes for December [($43,200 $11,800 - $600 - $700 - $4,000 - $400 -$2,500 - $500) x x 40%]. 400 400

3,700 3,700

1,500 1,500

1,400 1,400

9,080 9,080

Mackenzie Mangels(p.3)

Comp Problem 241: MMangels (continued)


a. Date Dec 1 1 1 8 12 15 23 26 27 29 31 Explanation Cash Debit 200,000 Credit 140,000 12,000 8,000 5,200 12,000 2,000 5,200 600 9,600 15,600 Accounts Receivable Debit 6,000 4,400 1,500 Balance 200,000 60,000 48,000 56,000 50,800 62,800 64,800 59,600 59,000 49,400 65,000

Date Dec 15 23 31 31

Explanation

Credit 2,000

Balance 6,000 4,000 8,400 9,900

Date Dec 1 31

Explanation

Prepaid Rent Debit 12,000

Credit 4,000

Balance 12,000 8,000

Date Dec 29

Explanation

Unexpired Insurance Debit 9,600

Credit

Balance 9,600

Date Dec 4 31

Explanation

Office Supplies Debit 1,000

Credit 400

Balance 1,000 600

Mackenzie Mangels(p.4)

Comp Problem 241: MMangels (continued)


a. Date Dec 1 Explanation Rental Equipment Debit 240,000 Credit Balance 240,000

Date Dec 31

Accumulated Depreciation: Rental Equipment Explanation Debit Credit 2,500

Balance 2,500

Date Dec 1

Explanation

Notes Payable Debit

Credit 100,000

Balance 100,000

Date Dec 4 17 27 31

Explanation

Accounts Payable Debit

Credit 1,000 600 700

600

Balance 1,000 1,600 1,000 1,700

Date Dec 31

Explanation

Interest Payable Debit

Credit 500

Balance 500

Mackenzie Mangels(p.5)

Comp Problem 241: MMangels (continued)


a. Date Dec 31 Explanation Salaries Payable Debit Credit 1,400 Balance 1,400

Date Dec 28

Explanation

Dividends Payable Debit

Credit 2,000

Balance 2,000

Date Dec 8 31

Explanation

Unearned Rental Fees Debit 3,700

Credit 8,000

Balance 8,000 4,300

Date Dec 31

Explanation

Income Taxes Payable Debit

Credit 9,080

Balance 9,080

Date Dec 1

Explanation

Share Capital Debit

Credit 200,000

Balance 200,000

Mackenzie Mangels(p.6)

Comp Problem 241: MMangels (continued)


a. & d. Date Explanation Dec 31 Income, 2013 31 Dividends Retained Earnings Debit 2,000 Credit 13,620 Balance 13,620 11,620

Date Dec 28 31 To close

Explanation

Dividends Debit 2,000

Credit 2,000

Balance 2,000 0

Date Explanation Dec 31 To close revenue accounts 31 To close expense accounts 31 To close

Income Summary Debit 29,580 13,620

Credit 43,200

Balance 43,200 13,620 0

Date Dec 15 31 31 31 31 To close

Explanation

Rental Fees Earned Debit

Credit 18,000 20,000 3,700 1,500

43,200

Balance 18,000 38,000 41,700 43,200 0

Date Dec 12 26 31 31 To close

Explanation

Salaries Expense Debit 5,200 5,200 1,400

Credit

11,800

Balance 5,200 10,400 11,800 0

Mackenzie Mangels(p.7)

Comp Problem 241: MMangels (continued)


a. & d. Date Dec 17 30 To close Explanation Maintenance Expense Debit 600 Credit 600 Balance 600 0

Date Dec 31 31 To close

Explanation

Utilities Expense Debit 700

Credit 700

Balance 700 0

Date Dec 31 31 To close

Explanation

Rent Expense Debit 4,000

Credit 4,000

Balance 4,000 0

Date Dec 31 31 To close

Explanation

Office Supplies Expense Debit 400

Credit 400

Balance 400 0

Mackenzie Mangels(p.8)

Comp Problem 241: MMangels (continued)


a. & d. Date Dec 31 31 To close Explanation Depreciation Expense Debit 2,500 Credit 2,500 Balance 2,500 0

Date Dec 31 31 To close

Explanation

Interest Expense Debit 500

Credit 500

Balance 500 0

Date Dec 31 31 To close

Explanation

Income Taxes Expense Debit 9,080

Credit 9,080

Balance 9,080 0

Mackenzie Mangels(p.9)

SUSQUEHANNA EQUIPMENT RENTALS Worksheet December 31, 2013


a. 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 Share capital 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 Rent expense Interest expense Depreciation expense Office supplies expense Income taxes expense
$ 65,000 8,400 12,000 9,600 1,000 240,000 $ 100,000 1,700 8,000 2,000 200,000 2,000 (b) (c) (g) (h) 38,000 10,400 600 700 $ 349,700 (g) 1,400 (e) (f) 500 2,500 1,400 9,080 3,700 1,500 11,800 600 700 4,000 500 2,500 400 9,080 364,680

COMPREHENSIVE PROBLEM 1 SUSQUEHANNA EQUIPMENT RENTALS (continued)


Income Statement Debit Credit
$

Debit

Adjustments* Credit

Adjusted Trial Balance Debit Credit


$ 65,000 9,900 8,000 9,600 600 240,000 $ 100,000 1,700 4,300 2,000 200,000 2,000 500 2,500 1,400 9,080 43,200 $

Balance Sheet Debit Credit


65,000 9,900 8,000 9,600 600 240,000 $ 100,000 1,700 4,300 2,000 200,000

(f)

1,500 (a) (d) $ 4,000 400

(e)

3,700

2,000 500 2,500 1,400 9,080 $ 43,200 11,800 600 700 4,000 500 2,500 400 9,080 29,580 13,620 43,200

$ 349,700 (a) (b) (c) (d) (h) 4,000 500 2,500 400 9,080 $ 23,080

$ 23,080

$ 364,680 $

43,200 $ 43,200

335,100 $ 335,100 $

Profit Totals * Adjustments (a) December rent expense ($12,000 3). (b) December interest expense ($100,000 x 6% x 1/12). (c) December depreciation expense ($240,000 96 months). (d) Office supplies used in December ($1,000 - $600).

321,480 13,620 335,100

(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.

Mackenzie Mangels(p.10)

Comp Problem 241: MMangels (continued)


b.
SUSQUEHANNA EQUIPMENT RENTALS Income Statement For the Year Ended December 31, 2013 Revenue: Rental fees earned Expenses Salaries expense Maintenance expense Utilities expense Rent expense Office supplies expense Depreciation expense Interest expense Profit before income taxes expense Income taxes expense @ 40% Profit $ $ 11,800 600 700 4,000 400 2,500 500 $ $ 43,200

20,500 22,700 9,080 13,620

SUSQUEHANNA EQUIPMENT RENTALS Statement of Changes in Equity For the Year Ended December 31, 2013 Retained earnings, December 1, 2013 Profit Subtotal Less: Dividends Retained earnings, December 31, 2013

$0 13,620 13,620 2,000 11,620

Mackenzie Mangels(p.11)

Comp Problem 241: MMangels (continued)


b.
SUSQUEHANNA EQUIPMENT RENTALS Balance Sheet December 31, 2013 Assets Cash Accounts Receivable Prepaid rent Unexpired insurance Office supplies Rental equipment Less: Accumulated depreciation Total assets Liabilities & Equity Liabilities: Notes payable Accounts payable Interest payable Salaries payable Dividends payable Unearned rental fees Income taxes payable Total liabilities Shareholders' equity: Share capital Retained earnings Total liabilities and shareholders' equity $ 65,000 9,900 8,000 9,600 600 237,500 330,600

240,000 2,500 $

$ $ $

100,000 1,700 500 1,400 2,000 4,300 9,080 118,980 200,000 11,620 330,600

c.

Notes to the financial statements: Note 1Depreciation policies Depreciation expense in the financial statements is computed by the straight-line method. The estimated useful life of the rental equipment is 8 years. Note 2Maturity dates of liabilities The Companys notes payable consist of a single obligation which matures on November 30, 2014. The maturity value of this note, including interest, will amount to $106,000. Note 3Pending litigation The Company has been named as a co-defendant in a $25,000 personal injury lawsuit. The extent of legal and financial responsibility, if any, cannot be determined at this time.

Mackenzie Mangels(p.12)

Comp Problem 241: MMangels (continued)


d.
General Journal (Closing Entries) 2013 Dec 31 Rent Fees Earned Income Summary To close the revenue account. 31 Income Summary Salaries Expense Maintenance Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense Interest Expense Income Taxes Expense To close the expense accounts. 31 Income Summary Retained Earnings To close the Income Summary account. 31 Retained Earnings Dividends To close the Dividends account. 43,200 43,200

29,580 11,800 600 700 4,000 400 2,500 500 9,080

13,620 13,620

2,000 2,000

e.
SUSQUEHANNA EQUIPMENT RENTALS After-Closing Trial Balance December 31, 2013 $

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 Share capital Retained earnings Totals

65,000 9,900 8,000 9,600 600 240,000 $ 2,500 100,000 1,700 500 1,400 2,000 4,300 9,080 200,000 11,620 333,100

333,100

Mackenzie Mangels(p.13)

Comp Problem 241: MMangels (concluded)


f. It does not appear that the company faces any immediate solvency problems. It did start with $200,000 cash, but in its first transaction the company spent $140,000 on equipment, leaving only $60,000 cash to begin operations. This amount had increased to $65,000 by the end of December. Thus, during its first month of operations, the business was able to generate $5,000 of positive cash flow from operations. The $100,000 note payable due on November 30, 2014, does raise a potential concern about the company's solvency, however. Currently, the business does not have sufficient liquid assets to satisfy this obligation. In fact, the company's working capital position is actually negative by $25,880 ($93,100 of current assets minus $118,980 of current liabilities). Likewise, its current ratio is only 0.78:1 ($93,100 of current assets divided by $118,980 of current liabilities). However, if the business can continue to generate at least $5,000 of positive operating cash flows each month, remaining solvent should not pose a serious issue. g. There is nothing at all unethical about Patty Driver (a founding shareholder) maintaining the accounting records for Susquehanna Equipment Rentals. In most businesses, the accounting records are maintained either by owners or employees, none of whom are independent of the organization. The concept of independence refers to auditing financial statements, where the auditor has to make an independent evaluation of the statements fairness. Independence does not apply to the routine maintenance of accounting records.

Mackenzie Mangels(p.14)