Reference no: EM132473366

Financial Accounting Case1

On December 1, 2014, Salem formed a company called Dubai Equipment Rentals (DER). The new company 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. During December, the DER entered into the following transactions. The company prepares financial statement monthly.

Point 1: Dec. 1 Issued to Salem 25,000 shares of capital stock in exchange for a total of $250,000 cash.

Point 2: Dec. 1 Purchased for $240,000 all of the equipment formerly owned by Rent-It. Paid $140,000 cash and issued a 6% one-year note payable for $100,000. The note, plus all 12-months of accrued interest, is due November 30, 2015.

Point 3: Dec. 1 Paid $12,000 to JAA as three months' advance rent on the rental yard and office formerly occupied by Rent-It.

Point 4: Dec. 4 Purchased office supplies on account from Modern Office Co., $1,100. Payment due in 30 days. (These supplies are expected to last for several months)

Point 5: Dec. 8 North construction Company (NCC) signed a contract with DER to rent different types of equipment for different periods. NCC opened an accounts with DER and paid $8,100 cash as advance payment for equipment rental.

Point 6: Dec. 15 Excluding the advance payment from North construction Company, DER earned rental fees during the first 15 days of December amounted to $19,000, of which $12,000 was received in cash.

Point 7: Dec. 17 Purchased from Earth Movers, Inc., $600 in parts needed to repair a rental tractor. Payment is due in 10 days. All the parts were used in December.

Point 8: Dec. 23 Collected $2,000 of the accounts receivable recorded on December 15.

Point 9: Dec. 26 Rented a JCB to Mission Landscaping at a price of $250 per day, to be paid when the JCB is returned. Mission Landscaping expects to keep the JCB for about two to three weeks.

Point 10: Dec. 26 Paid monthly salaries, $11,400.

Point 11: Dec. 28 Declared & paid a dividend of $2,000.

Point 12: 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, 2015.

Point 13: Dec. 31 Received a bill from Universal Utilities for the month of December, $700. Payment is due in 30 days.

Financial Accounting

Point 1: 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 rental equipment is being depreciated by the straight-line method over a period of eight years. Assume a salvage value of zero.

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

d. During December, the DER earned $5,700 of the rental fees paid in advance by North Construction Company on December 8.

e. As of December 31, six days' rent on the JCB rented to Mission Landscaping on December 26 has been earned.

f. Overtime Salaries & wages earned by employees & not paid as of Dec. 31, 2014 amounted to $1,400.

Instructions

Question a. Use Excel to record the above transaction using the accounting equation as we did in class

Question b. Prepare the Income Statement, Retained Earnings & Balance Sheet of DER on Dec. 31, 2014.

Question c. What is the cash balance at the end of December? Does the drop in cash during December mean that DER is heading for insolvency in the near future? Explain your reasoning.

Question d. What is the type of account you used to record the advance receipt of money on Dec. 8th from North construction? Did the balance of that account change at the end of December? Explain why?