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A Prepaid Items On Financial Statements
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
0
=
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
EXERCISE 2-27A
Exercise 2-27A Effect of accounting events on the income statement and statement
of cash flows
Required
Explain how each of the following events or series of events and the related adjusting entry will
affect the amount of net income and the amount of cash flow from operating activities reported
on the year-end financial statements. Identify the direction of change (increase, decrease, or NA)
and the amount of the change. Organize your answers according to the following table. The first
event is recorded as an example. If an event does not have a related adjusting entry, record only
Cash Flows from
Net Income Operating Activities
Event/ Direction of Amount of Direction of Amount of
Adjustment Change Change Change Change
a NA NA Decrease $9,000
Adj Decrease $2,250 NA NA
a. Paid $9,000 cash on October 1 to purchase a one-year insurance policy.
b. Purchased $2,000 of supplies on account. Paid $500 cash on accounts payable. The ending
balance in the Supplies account, after adjustment, was $300.
c. Provided services for $10,000 cash.
d. Collected $2,400 in advance for services to be performed in the future. The contract called for
services to start on May 1 and to continue for one year.
e. Accrued salaries amounting to $5,600.
f. Sold land that cost $3,000 for $3,000 cash.
g. Acquired $15,000 cash from the issue of common stock.
h. Earned $12,000 of revenue on account. Collected $8,000 cash from accounts receivable.
i. Paid cash operating expenses of $4,500.
e. Paid cash for rent expense.
f. Performed services for cash.
g. Performed services for clients on account.
h. Collected cash from accounts receivable.
i. Received cash for services to be performed in the future.
j. Purchased land with cash.
TABLE PROVIDED BELOW
Net Income
Cash Flow from
Operating Activities
Event/Adj.
Direction of Change
Amount of Change
Direction of Change
Amount of Change
a. Event
Adj.
b. Event
Adj.
b. Event
No adj.
d. Event
Adj.
e. Event
No adj.
f. Event
No adj.
f. Event
No adj.
g. Event
No adj.
h. Event
No adj.
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