Comprehensive Problem 1 Solutions Manual

COMPREHENSIVE PROBLEM 1
SUSQUEHANNA EQUIPMENT RENTALS

Susquehanna Equipment Rentals
A mini-practice set illustrating the complete accounting cycle for a service-type
business. Includes computation of income taxes expense (as a percentage of
income before taxes) and an evaluation of solvency. Can be done as a group
assignment.
The McGraw-Hill Companies, Inc., 2010

CP1-Desc.
5 to 6 hours
Strong
5 to 6 hours, Strong
a.
General Journal
December Daily Transactions
2009
Dec
1 Cash
200,000
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.
200,000
240,000
140,000
100,000
12,000
12,000
4 Office Supplies
Accounts Payable
Purchased supplies on account; payment due in
30 days.
1,000
8 Cash
8,000
1,000
Unearned Rental Fees

Received advance payment for equipment rental
by McNamer Construction Company.
8,000
12 Salaries Expense
Cash
Paid salaries for first two weeks in December.
5,200
15 Cash
Accounts Receivable
Rental Fees Earned
To record rental fees earned in first 15 days of
December,
12,000
6,000
17 Maintenance Expense
Accounts Payable
To record purchase of repair parts on account
from Earth Movers Limited; payment due in 10 days.
23 Cash
5,200
18,000
600
600
2,000
Accounts Receivable
Collection of an accounts receivable.
23 (No entry required to record rental of backhoe.)

CP1
2,000
(continued)
a.
General Journal
December Daily Transactions
2009
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, 2010.
5,200
5,200
600
600
2,000
2,000
29 (No journal entry required to record lawsuit.)

29 Unexpired Insurance
Cash
Purchased 12-month liability policy, effective
January 1, 2010.
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.

CP1(p.2)
9,600
9,600
700
700
15,600
4,400
20,000
(continued)
a.
General Journal
(Adjusting Entries)
2009
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.
4,000
4,000
500
500
2,500
2,500
Depreciation for December ($240,000 8 years x 1/12
= $2,500).
31 Office Supplies Expense
Office Supplies
To record office supplies used during the month.
($1,000 - $600 = $400)
400
400
31 Unearned Rental Fees

Rental Fees Earned
To record portion of advance payment by McNamer
Construction Co. earned during December.
3,700
31 Accounts Receivable
Rental Fees Earned
To record fees earned from Mission Landscaping
on backhoe rental (6 days x $250 per day).
1,500
31 Salaries Expense
Salaries Payable
To record accrued salaries payable at month-end.
1,400
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
40%].
x 40%].
9,080

CP1(p.3)
3,700
1,500
1,400
9,080
(continued)
a.
Date
Dec
Explanation
1
1
1
8
12
15
23
26
27
29
31
Date
Dec
Dec
Dec
Dec
8,000
5,200
12,000
2,000
5,200
600
9,600
15,600
Credit
4,400
1,500
Prepaid Rent
Debit
Credit
4,000
29
Unexpired Insurance
Debit
Credit
Office Supplies
Debit
9,600
Credit
Balance
1,000
400

CP1(p.4)
12,000
8,000
Balance
9,600
Explanation
6,000
4,000
8,400
9,900
Balance
12,000
Explanation
200,000
60,000
48,000
56,000
50,800
62,800
64,800
59,600
59,000
49,400
65,000
Balance
2,000
1
31
4
31
Accounts Receivable
Debit
6,000
Explanation
Date
Balance
140,000
12,000
15
23
31
31
Date
Credit
200,000
Explanation
Date
Cash
Debit
1,000
600
(continued)
a.
Date
Dec
Explanation
1
Notes Payable
Debit
Credit
4
17
27
31
Accounts Payable
Debit
Credit
600
700
Interest Payable
Debit
31
Credit
100,000
1,000
1,600
1,000
1,700
Balance
500

CP1(p.5)
2,500
Balance
1,000
600
Explanation
Balance
Balance
100,000
Explanation
Date
Dec
240,000
2,500
Explanation
Date
Dec
Balance
240,000
31
Date
Dec
Credit
Accumulated Depreciation: Rental Equipment

Explanation
Debit
Credit
Date
Dec
Rental Equipment
Debit
500
(continued)
a.
Date
Dec
Explanation
31
Date
Dec
Dec
Credit
2,000
Explanation
8
31
Unearned Rental Fees

Debit
Credit
8,000
3,700
Explanation
Income Taxes Payable

Debit
31
Date
Dec
Dividends Payable
Debit
28
Date
Credit
1,400
Explanation
Date
Dec
Salaries Payable
Debit
Credit
9,080
Explanation
Share Capital
Debit
Credit
200,000

CP1(p.6)
Balance
1,400
Balance
2,000
Balance
8,000
4,300
Balance
9,080
Balance
200,000
(continued)
a. & d.
Date
Dec
Explanation
31 Income, 2009
31 Dividends
Date
Dec
Dec
Dec
Credit
2,000
31 To close revenue accounts

31 To close expense accounts
31 To close
Explanation
15
31
31
31
31 To close
Income Summary
Debit
Credit
43,200
29,580
13,620
Rental Fees Earned

Debit
Credit
18,000
20,000
3,700
1,500
43,200
Explanation
12
26
31
31 To close
Dividends
Debit
2,000
Explanation
Date
Dec
13,620
28
31 To close
Date
Credit
2,000
Explanation
Date
Retained Earnings
Debit
Salaries Expense
Debit
Credit
5,200
5,200
1,400
11,800

CP1(p.7)
Balance
13,620
11,620
Balance
2,000
0
Balance
43,200
13,620
0
Balance
18,000
38,000
41,700
43,200
0
Balance
5,200
10,400
11,800
0
(continued)
a. & d.
Date
Dec
Explanation
17
30 To close
Date
Dec
Dec
Dec
Utilities Expense
Debit
Credit
700
31
31 To close
Rent Expense
Debit
Credit
4,000
Office Supplies Expense

Debit
Credit
4,000
0
Balance
400
400

CP1(p.8)
700
0
Balance
4,000
Explanation
600
0
Balance
700
Explanation
31
31 To close
Balance
600
31
31 To close
Date
Credit
600
Explanation
Date
Maintenance Expense
Debit
400
0
(continued)
a. & d.
Date
Dec
Explanation
31
31 To close
Date
Dec
Dec
Balance
2,500
31
31 To close
Interest Expense
Debit
Credit
500
Income Taxes Expense

Debit
Credit
9,080
9,080

CP1(p.9)
2,500
0
Balance
500
Explanation
31
31 To close
Credit
2,500
Explanation
Date
Depreciation Expense
Debit
500
0
Balance
9,080
0
SUSQUEHANNA EQUIPMENT
RENTALS (continued)

Worksheet
December 31, 2009
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
Debit
Adjustments*
Credit
Adjusted Trial Balance

Debit
Credit
$
(f)
1,500
(a)
(d)
$ 100,000
1,700
8,000
2,000
200,000
-
(e)
4,000
400
65,000
9,900
8,000
9,600
600
240,000
3,700
10,400
(g)
$ 349,700
4,000
500
2,500
400
9,080
$ 23,080
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).
500
2,500
1,400
9,080
500
2,500
1,400
9,080
(e)
(f)
3,700
1,500
43,200
11,800
600
700
500
2,500
1,400
9,080
$ 43,200
$
364,680
11,800
600
700
4,000
500
2,500
400
9,080
$ 23,080
$ 364,680
$
4,000
500
2,500
400
9,080
29,580
13,620
43,200
43,200
335,100
$ 43,200
$ 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.

CP1(p.10)
100,000
1,700
4,300
2,000
200,000
2,000
(b)
(c)
(g)
(h)
1,400
(a)
(b)
(c)
(d)
(h)
65,000
9,900
8,000
9,600
600
240,000
$
2,000
38,000
Balance Sheet
Debit
Credit
$ 100,000
1,700
4,300
2,000
200,000
2,000
600
700
$ 349,700
Income Statement
Debit
Credit
321,480
13,620
335,100
(continued)
b.
Income Statement
For the Year Ended December 31, 2009
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

Statement of Changes in Equity
For the Year Ended December 31, 2009
Retained earnings, December 1, 2009
Profit
Subtotal
Less: Dividends
Retained earnings, December 31, 2009

CP1(p.11)
$0
13,620
13,620
2,000
11,620
(continued)
b.
Balance Sheet
December 31, 2009
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
Total liabilities
Shareholders' equity:
Share capital
Retained earnings
Total liabilities and shareholders' equity
c.
65,000
9,900
8,000
9,600
600
240,000
2,500
$
$
$
$
237,500
330,600
100,000
1,700
500
1,400
2,000
4,300
9,080
118,980
200,000
11,620
330,600
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,
2010. 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.

CP1(p.12)
(continued)
d.
General Journal
(Closing Entries)
2009
Dec
31 Rent Fees Earned

Income Summary
To close the revenue account.
43,200
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.
29,580
31 Income Summary
Retained Earnings
To close the Income Summary account.
13,620
43,200
11,800
600
700
4,000
400
2,500
500
9,080
13,620
31 Retained Earnings
Dividends
To close the Dividends account.
e.
2,000
2,000

After-Closing Trial Balance
December 31, 2009
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
Share capital
Retained earnings
Totals
65,000
9,900
8,000
9,600
600
240,000
$

CP1(p.13)
333,100
2,500
100,000
1,700
500
1,400
2,000
4,300
9,080
200,000
11,620
333,100
(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, 2010, 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.

CP1(p.14)

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COMPREHENSIVE PROBLEM 1

SUSQUEHANNA EQUIPMENT RENTALS

The McGraw-Hill Companies, Inc., 2010

Unearned Rental Fees

The McGraw-Hill Companies, Inc., 2010

29 (No journal entry required to record lawsuit.)

The McGraw-Hill Companies, Inc., 2010

Depreciation for December ($240,000 8 years x 1/12

31 Unearned Rental Fees

31 Income Taxes Expense

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

Accumulated Depreciation: Rental Equipment

Unearned Rental Fees

Income Taxes Payable

The McGraw-Hill Companies, Inc., 2010

31 To close revenue accounts

Rental Fees Earned

The McGraw-Hill Companies, Inc., 2010

Office Supplies Expense

The McGraw-Hill Companies, Inc., 2010

Income Taxes Expense

The McGraw-Hill Companies, Inc., 2010

SUSQUEHANNA EQUIPMENT RENTALS

Adjusted Trial Balance

(e) Portion of unearned revenue earned in December.

The McGraw-Hill Companies, Inc., 2010

Income taxes expense @ 40%

SUSQUEHANNA EQUIPMENT RENTALS

The McGraw-Hill Companies, Inc., 2010

Notes to the financial statements:

The McGraw-Hill Companies, Inc., 2010

31 Rent Fees Earned

SUSQUEHANNA EQUIPMENT RENTALS

The McGraw-Hill Companies, Inc., 2010

The McGraw-Hill Companies, Inc., 2010

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