Question

Life, Inc. experienced the following events in Year 1, its first year of operation: Performed counseling services for $26,800 cash. On February 1, Year 1, paid $18,600 cash to rent office space for the coming year. Adjusted the accounts to reflect the amount of rent used during the year. Required Based on this information alone: a. Record the events in accounts under an accounting equation. (Enter any decreases to account balances with a minus sign.) b. Prepare an income statement, balance sheet, and statement of cash flows for the Year 1 accounting period. (In statement of cash flows, cash outflows should be indicated with a minus sign.) c. Ignoring all other future events, what is the amount of rent expense that would be recognized in Year 2?

Answer 1

Answer:

a. I divided the accounting equation in two parts:

    Assets                                      = Liabilities      +       Equity

    Cash             Prepaid rent        

1)   $26,800                 0                        0                      $26,800

2)  -$18,600         $18,600                    0                            0

3)         0              -$17,050                    0                      -$17,050

     $8,200           $1,550                      0                        $9,750

    Revenues     -       Expenses       =      Net income       Type of cash flow

1)   $26,800                    0                        $26,800                OA

2)        0                          0                               0                      OA

3)        0                       $17,050                -$17,050                 OA

    $26,800                $17,050                  $9,750

b. Life, Inc.

Income Statement

For the year ended December 31, Year 1

Revenues           $26,800

Expenses           -$17,050

Net income          $9,750

Life, Inc.

Balance Sheet

For the year ended December 31, Year 1

Assets:

Cash $8,200

Prepaid rent $1,550

Total assets = $9,750

Liabilities: $0

Equity: $9,750

Total assets and liabilities = $9,750

Life, Inc.

Statement of Cash Flows

For the year ended December 31, Year 1

Cash flows form operating activities:

Net income                                          $9,750

Adjustments to net income:

Increase in prepaid rent                     ($1,550)

Cash flows from operating activities $8,200

Cash flows form investing activities         $0

Cash flows form financing activities         $0

Net increase in cash position            $8,200

Initial cash balance                                   $0

Ending cash balance                         $8,200

c. $1,550