On December 1, Year 1, John and Patty Driver formed a corporation called Susquehanna Equipment Rentals. The 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. 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.page 248 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. Data for Adjusting Entries in Year 1 The advance payment of rent on December 1 covered a period of three months. The annual interest rate on the note payable to Rent-It is 6 percent. The rental equipment is being depreciated by the straight-line method over a period of eight years. Any salvage value at the end of its useful life is expected to be negligible and immaterial. 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 McNamer Construction Company on December 8. As of December 31, six days’ rent on the backhoe rented to Mission 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 state income tax rate of 40 percent of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in Year 2. Instructions: During December, the company’s cash balance fell from $240,000 to $78,000. Does this imply that the business is headed for insolvency in the near future? Explain your reasoning.

Question

On December 1, Year 1, John and Patty Driver formed a corporation called Susquehanna Equipment Rentals. The 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. 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.page 248

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.

Data for Adjusting Entries in Year 1

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

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

The rental equipment is being depreciated by the straight-line method over a period of eight years. Any salvage value at the end of its useful life is expected to be negligible and immaterial.

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 McNamer Construction Company on December 8.

As of December 31, six days’ rent on the backhoe rented to Mission 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 state income tax rate of 40 percent of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in Year 2.

Instructions: During December, the company’s cash balance fell from $240,000 to $78,000. Does this imply that the business is headed for insolvency in the near future? Explain your reasoning.