FINANCE

Exercise 2-15A

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.

Required

Based on this information alone:

a. Record the events under an accounting equation.

TABLE PROVIDED BELOW

 

EXERCISE 2-15A

a.

Life, Inc.

Effect of Events on the Accounting Equation

 
  Assets = Stockholders’ Equity
 

Event

 

Cash

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

         
  Assets      
        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?

 

EXERCISE 2-19A

 

Exercise 2-19A on page 111

Exercise 2-19A Supplies, unearned revenue, and the financial statements model

Hart, Attorney at Law, experienced the following transactions in 2016, the first year of

operations:

1. Accepted $36,000 on April 1, 2016, as a retainer for services to be performed evenly over the

next 12 months.

2. Performed legal services for cash of $54,000.

3. Purchased $2,800 of office supplies on account.

4. Paid $2,400 of the amount due on accounts payable.

5. Paid a cash dividend to the stockholders of $5,000.

6. Paid cash for operating expenses of $31,000.

7. Determined that at the end of the accounting period $200 of office supplies remained on

hand.

8. On December 31, 2016, recognized the revenue that had been earned for services performed

in accordance with Transaction 1.

Required

Show the effects of the events on the financial statements using a horizontal statements model

like the following one. In the Cash Flows column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, and NC for net change in cash. Use NA

to indicate accounts not affected by the event. The first event has been recorded as an example.

Event

Assets 5 Liabilities 1 Stk. Equity

No. Cash 1 Supplies 5 Accts. Pay 1 Unearn. Rev. 1 Ret. Earn. Rev. 2 Exp. 5 Net Inc. Cash Flow

1. 36,000 1 NA 5 NA 1 36,000 1 NA NA 2 NA 5 NA 36,000 OA

TABLE PROVIDED BELOW

 

 

 

Hart Attorney At Law

Effect of Transactions on the Financial Statements for 2016

 
    Balance Sheet   Income Statement   Statement of
    Assets = Liabilities + S. Equity   Rev Exp. = Net Inc.   Cash Flows
 

No.

   

Cash

 

+

 

Supplies

 

=

Accts. Payable  

+

Unearn. Rev.  

+

Retained

Earnings

               
1.     +   =   +   +         =      
2.     +   =   +   +         =      
3.     +   =   +   +         =      
4.     +   =   +   +         =      
5.     +   =   +   +         =      
6.     +   =   +   +         =      
7.     +   =   +   +         =      
8.     +   =   +   +         =      
Totals   51,600 + 200 = 400 + 9,000 + 42,400   81,000 33,600 = 47,400   51,600  NC
                                     

 

 

 

 

 

 

 

 

 

 

 

 

 

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