c$.$ Prepare an income statement and statement of retained earnings for the year ended December $31,$ and a balance sheet as of December $31,$ Year $1$

d $.$ Prepare required disclosures to accompany the financial statements dated December $31,$ Year $1.$ Your disclosures should include separate write$-$ups addressing each of the following areas: $(1)$ depreciation policy, $(2)$ maturity dates of major liabilities, and $(3)$ potential liability due to pending litigation.

e$.$ Prepare closing entries and post them to ledger accounts.

f$.$ Prepare an after$-$closing trial balance as of December $31,$ Year $1.$

COMPREHENSIVE PROBLEM $1$

Susquehanna Equipment Rentals

Page $247$

A COMPREHENSIVE ACCOUNTING CYCLE PROBLEM

On December $1,$ Year $1,$ John and Patty Driver formed a corporation called Susquehanna 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 Capital Stock

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 December $31.$ During December of its first year of operations, the corporation entered into the following transactions.

Dec. $1$ Issued to John and Patty Driver $20,000$ shares of capital stock in exchange for a total of $$240,000$ cash.

Dec. $1$ Purchased for $$288,000$ all of the equipment formerly owned by Rent$-$It$.$ Paid $$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 $$14,400$ to Shapiro Realty as three months$$ advance rent on the rental yard and office formerly occupied by Rent$-$It$.$

Dec$\mathrm{.}4$ Purchased office supplies on account from Modern Office Co$.,$ $$1,200.$ Payment due in $30$ days. $($These supplies are expected to last for several months; debit the Office Supplies asset account.$)$

Dec. $8$ Received $$9,600$ cash as advance payment on equipment rental from McNamer Construction Company. $($Credit Unearned Rental Fees.$)$

Dec. $12$ Paid salaries of $$6,240$ for the first two weeks in December.

Dec. $15$ Excluding the McNamer 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 perform basic maintenance on 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 Mission Landscaping at a price of $$300$ per day, to be paid when the backhoe is returned. Mission 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. $29$ Susquehanna Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co$-$defendant in a $$30,000$ 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 December $26,$ 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.$)$

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.

However, the policy goes into effect on January $1,$ Year $2,$ and affords no coverage for the injuries sustained by Kevin Davenport on December $26.$

Dec. $31$ Received a bill from Universal Utilities 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.

Page $248$

Data for Adjusting Entries in Year $1$

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

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

c$.$ The rental equipment is being depreciated by the straight$-$line method o