Q1. On December 1, 2007, JP Driver formed a corporation called J&P 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
Accounts Receivable
Prepaid Rent
Unexpired Insurance
Office Supplies
Rental Equipment
Accumulated Depreciation
Rental Equipment
Notes Payable
Accounts Payable
Interest Payable
Salaries Payable
Dividends Payable

Unearned Rental Fees

Income Taxes Payable
Dividends
Retained Earnings
Capital Stock
Rental Fees Earned
Salaries Expense
Maintenance Expense
Utilities 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
Dec. 1
Dec. 4
Dec. 8
Dec. 12
Dec. 15
Dec. 17
Dec. 23
Dec. 23
Dec. 26
Dec. 27
Dec. 28

Invested $500,000 in the business.

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.
Paid $12,000 to Shapiro Realty as three months advance rent on the rental yard and
office formerly occupied by Rent-It.
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.)
Received $8,000 cash as advance payment on equipment rental from McNamer
Construction Company. (Credit Unearned Rental Fees.)
Paid salaries for the first two weeks in December, $5,200.
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.
Purchased on account from Earth Movers, Inc., $600 in parts needed to repair a rental
tractor. (Debit an expense account.) Payment is due in 10 days.
Collected $2,000 of the accounts receivable recorded on December 15.
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 or three weeks.
Paid biweekly salaries, $5,200.
Paid the account payable to Earth Movers, Inc., $600.
Declared a dividend of 10 cents per share, payable on January 15, 2008.

Dec. 29 J&P 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 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 companys 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 $9,600. 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, 2008, 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, $700. Payment is
due in 30 days.
Dec. 31 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 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 over a period of
eight years.
d. Office supplies on hand at December 31 are estimated at $600.
e. During December, the company earned $3,700 of the rental fees paid in advance by
McNamer Construction Co. on December 8.
f. As of December 31, six days rent on the backhoe rented to Mission Landscaping on
December 23 has been earned.
g. Salaries earned by employees since the last payroll date (December 26) amounted to
$1,400 at month-end.
h. 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 2008.
Instructions
a. Journalize the December transactions.
b. Prepare the necessary adjusting entries.

c. Post the December transactions and adjusting entries to ledger accounts.

d. Prepare trial balance as of December 31.
e. Prepare an income statement for December 31, and a balance sheet as of December 31.
f. Prepare the cash flow statement for December 31.
g. Prepare the closing entries.
h. Make the closing trial balance.