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BAO2202 Financial Accounting

Question

Answered

Questions:

RENT-ME INCORPORATED

On December 1, Year 1, Jack and Diane Jones formed a corporation Rent-Me Incorporated. The new corporation was able to begin operations immediately by purchasing the assets and taking over the location of Cabot Trail Rentals, 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 (Liability)

Income Taxes Payable

Capital Stock

Retained Earnings

Dividends

Income Summary

Rental Fees Earned (Revenue)

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, the corporation entered into the following transactions.

Dec. 1

Issued to Jack and Diane Jones 20,000 shares of capital stock in exchange for a total of $240,000 cash.

Dec. 1

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

Dec. 1

Paid $14,400 to Cape Breton Realty as three months’ advance rent on the rental yard and office formerly occupied by Cabot Trail Rentals.

Dec. 4

Purchased office supplies on account from Connors Basics, $1,200. Payment due in 30 days. (Upon pick up Diane exclaimed, “I don’t know why Jack ordered so many supplies – these will last us several months!”)

Dec. 8

Received $9,600 cash as advance payment on equipment rental from RD Construction Company.

Dec. 12

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

Dec. 15

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

Dec. 17

Purchased on account from Earth Movers, Inc., $720 in parts needed to repair a rental tractor. Payment is due in 10 days.

Dec. 23

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

Dec. 26

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

Dec. 26

Paid biweekly salaries, $6,240.

Dec. 27

Paid the account payable to Earth Movers, Inc., $720.

Dec. 28

Declared a dividend of 12 cents per share, payable on January 15, Year 2.

Dec. 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. The policy goes into effect on January 1, Year 2.

Dec. 31

Received a bill from Nova Scotia Power for the month of December, $840.

Payment is due in 30 days

Dec. 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

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

The annual interest rate on the note payable to Cabot Trail Rentals is 6 percent.

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

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

During December, the company earned $4,440 of the rental fees paid in advance by RD Construction Company on December 8.

As of December 31, six days’ rent on the backhoe rented to Sydney Landscaping on December 26 has been earned.

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

It is estimated that the company is subject to a combined federal and provincial income tax rate of 40 percent of income before income taxes. These taxes will be payable in Year 2

Instructions

1.Perform the following steps of the accounting cycle for the month of December using the Excel file “5203 Assignment 1 Working File”.

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 for the year ended December 31.

Prepare the necessary adjusting entries for December.

Post the December adjusting entries to the appropriate ledger accounts.(Use the same ledger as you did for step 2)

2.Prepare adjusted trial balance for the year ended December 31. (This trial balance will include your account balances after posting your adjusting entries)

3.Prepare financial statements in good form. Specifically, prepare an income statement and statement of retained earnings for the year ended December 31, and a balance sheet (in report form) as of December 31. (Do not prepare a statement of cash flows).

4Prepare closing entries and post to general ledger accounts.

5.Prepare an after-closing trial balance as of December 31.

6.During December, this company’s cash balance has fallen from $240,000 to $78,000. Does it appear headed for insolvency in the near future?

BAO2202 Financial Accounting

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