Exercise 2-15 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

=

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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