Prepaid items on financial statements

Life, Inc., experienced the following events in 2016, its first year of operation:

1. Performed counseling services for $36,000 cash.

2. On February 1, 2016, paid $18,000 cash to rent office space for the coming year.

3. Adjusted the accounts to reflect the amount of rent used during the year.


Based on this information alone:

a. Record the events under an accounting equation.





Life, Inc.

Effect of Events on the Accounting Equation

  Assets = Stockholders’ Equity




Prepaid Rent  



Retained Earnings

1. Performed Services 36,000     36,000
2. Prepaid Rent (18,000) 18,000   NA
3. Used Rent   (18,000)   (18,000)       
Totals 18,000 = 18,000



b. Prepare an income statement, balance sheet, and statement of cash flows for the 2016 accounting period.

Life, Inc.

Income Statement

For the Year Ended December 31, 2016

     Revenue 36,000  
     Expense 18,000  
     Net Income 18,000  





Life, Inc.

Balance Sheet

As of December 31, 2016

        Cash 36,000    
        Prepaid Rent 18,000    
  Total Assets 54,000    
  Liabilities (18,000)    
  Stockholders’ Equity      
        Retained Earnings      
  Total Stockholders’ Equity      
  Total Liab. and Stockholders’ Equity      

EXERCISE 2-15A b. (cont.)


Life, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2016

  Cash Flows From Operating Activities:      
     Cash Receipt from Revenue      
     Cash Payment for Rent      
  Net Cash Flow from Operating Activities      
  Cash Flows From Investing Activities      
  Cash Flows From Financing Activities:      
  Net Change in Cash      
  Plus: Beginning Cash Balance      
  Ending Cash Balance      


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

in 2017?


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