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10 July, 14:16

Life, Inc. experienced the following events in Year 1, its first year of operation: 1. Performed counseling services for $20,400 cash. 2. On February 1, Year 1, paid $13,800 cash to rent office space for the coming year. 3. Adjusted the accounts to reflect the amount of rent used during the year. Required:

Based on this information alone:

a. Record the events under an accounting equation.

b. Prepare an income statement, balance sheet, and statement of cash flows for the year accounting period.

c. Ignoring all other future events, what is the amount of rent expense that would be recognized in nex year?

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  1. 10 July, 14:32
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    a.

    Accounting Equation

    Event Assets = Equity + Liability

    1. Services + $20,400 + $20,400

    2. Rent Payment - $13,800

    +$13,800

    3. Adjustment - $12,650 - $12,650

    b.

    Income Statement

    Revenue $20,400

    Expenses $12,650

    Net Income $7,750

    Balance Sheet

    Assets

    Prepaid Rent $1,150

    Cash $6,600

    Total Assets $7,750

    Equity and Liability

    Equity (Retained Earning) $7,750

    Liabilities $0

    Total Assets $7,750

    Statement of cash flow

    Cash flow from Operating activities

    Net profit $7,750

    Increase in receivable ($1,150)

    Net Operating Cash flow $6,600

    Net Investing Cash flow $0,000

    Net Financing Cash flow $0,000

    Total Net cash flow $6,600

    Opening cash balance $0,000

    Closing cash balance $6,600

    c.

    Year 1 Rent Expense = $13,800 x (11 / 12) = 12,650

    Rent Expense Expense to recognized next year = Prepaid Rent = $1,150

    Explanation:

    * Year end is December 31, Year 1

    As 11 months passed from February 1, Year 1 and expense of these months has been accrued, so only one months rent remains prepaid.

    Prepaid rent = $13,800 - $12650 = $1,150

    Cash = $20,400 - 13,800 = $6,600
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