Reference no: EM132588080

A Comprehensive Accounting Cycle Problem

On 1 December 2009, Yumna Mikayla formed a corporation called Sunshine 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 Income                      Taxes Payable

Accounts Receivable             Share Capital

Prepaid Rent                       Retained Earnings

Unexpired Insurance              Dividends

Office Supplies                     Income Summary

Rental Equipment                   Rental Fees Earned

Accumulated Depreciation:       Salaries Expense

Rental Equipment                    Maintenance Expense

Notes Payable                         Utilities Expense

Accounts Payable                       Rent Expense

Interest Payable Office             Supplies Expense

Salaries Payable                        Depreciation Expense

Dividends Payable                        Interest Expense

Unearned Rental Fees                   Income Taxes Expense

The corporation performs adjusting entries monthly. Closing entries are performed annually on 31 December. During December, the corporation entered into the following transactions:

1 Dec. Issued to Yumna Mikayla 20,000 new shares in exchange for a total of $200,000 cash.

1 Dec. Purchased for $240,000 all of the equipment formerly owned by Rent-It. Paid $140,000 cash and issued a one-year note payable for $100,000.

1 Dec. Paid $12,000 to Shapiro Realty as three months' advance rent on the rental yard and office formerly occupied by Rent-It.

4 Dec. Purchased office supplies on account from Modern Office Co., $1,000. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)

8 Dec. Received $8,000 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.)

12 Dec. Paid salaries for the first two weeks in December, $5,200.

15 Dec. Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,000, of which $12,000 was received in cash.

17 Dec. Purchased on account from Earth Movers Limited, $600 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 10 days.

23 Dec. Collected $2,000 of the accounts receivable recorded on 15 December.

23 Dec. Rented a backhoe to Mission Landscaping at a price of $250 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two to three weeks.

26 Dec. Paid biweekly salaries, $5,200.

27 Dec. Paid the account payable to Earth Movers Limited, $600.

28 Dec. Declared a dividend of 10 cents per share, payable on 15 January 2010.

29 Dec. Eureka Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co-defendant in a $25,000 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 26 December, 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 notes accompanying the statements.)

29 Dec. Purchased a 12-month public-liability insurance policy for $9,600. This policy protects the company against liability for injuries and property damaged caused by no its equipment. However, the policy goes into effect on 1 January 2010, and affords no coverage for the injuries sustained by Kevin Davenport on 26 December.

31 Dec. Received a bill from Universal Utilities for the month of December, $700. Payment is due in 30 days.

31 Dec Equipment rental fees earned during the second half of December amounted to $20,000, of which $15,600 was received in cash.

Data for adjusting Entries

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

b. The annual interest rate on the note payable to Rent-It is 6 per cent.

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

d. Office supplies on hand at 31 December are estimated at $600.

e. During December, the company earned $3,700 of the rental fees paid in advance by McNamer Construction Co. on 8 December.

f. As of 31 December, six days' rent on the backhoe rented to Mission Landscaping on 23 December has been earned.

g. Salaries earned by employees since the last payroll date (26 December) amounted to $1,400 at month-end.

h. It is estimated that the company is subject to an income tax rate of 40 per cent of profit before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in 2010.

Instructions

Question a. Perform the following steps of the accounting cycle for the month of December.

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

2. Post the December transactions to the appropriate T-ledger accounts.

3. Prepare the unadjusted trial balance columns of a 10-column worksheet for the year ended 31 December.

4. Prepare the necessary adjusting entries for December.

5. Post the December adjusting entries to the appropriate T-ledger accounts.

6. Complete the 10-column worksheet for the year ended 31 December.

Question b. Prepare an income statement and statement of changes in equity for the year ended 31 December, and a balance sheet (in report form) as of 31 December.

Question c. Prepare required disclosures to accompany the 31 December financial statements. Your solution should include a separate note addressing each of the following areas: (1) depreciation policy, (2) maturity dates of major liabilities, and (3) potential liability due to pending litigation.

Question d. Prepare closing entries and post to ledger accounts.

Question e. Prepare an after-closing trial balance as at 31 December.

Question f. During December, this company's cash balance has fallen from $200,000 to $65,000. Does it appear headed for insolvency in the near future? Explain your reasoning.

Question g. Would it be ethical; for Yumna Mikayla to maintain the accounting records for this company, or must they be maintained by someone who is independent of the organization?