Question

Life, Inc. experienced the following events in Year 1, its first year of operation:

1. Performed counseling services for $18,800 cash.
2. On February 1, Year 1, paid $12,600 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 in general ledger accounts under an accounting equation. (Do not round intermediate calculations. Enter any decreases to account balances with a minus sign.)

LIFE, INC. Effect of Events on the Accounting Equation Assets Stockholders' Equity Event Retained Cash Prepaid Rent = Earnings 1. Performed services 2. Prepaid rent 3. Used rent Totals

b. Prepare an income statement, balance sheet, and statement of cash flows for the Year 1 accounting period. (Do not round intermediate calculations. Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer

• Requirement [a]

LIFE Inc
Event	Cash	Prepaid rent	Retained earnings
1	$18,800		$18,800
2	($12,600)	$12,600
3		($11,550)	($11,550)
Totals	$6,200	$1,050	$7,250

• [b]

Income Statement
Revenue:Service revenue	$18,800
Expense:Rent Expense [$12600 x 11 months / 12 months]	($11,550)
Net Income	$7,250
Balance Sheet
Assets:
Cash	$6,200
Prepaid rent	$1,050
Total Assets		$7,250
Liabilities:
Stockholder's Equity:
Common Stock
Retained earnings	$7,250
Total Stockholder's equity		$7,250
Total Liabilities & Equity		$7,250
Statement of Cash Flows
Cash Flows from Operating Activities:
Cash received from service provided	$18,800
Cash paid for rent	($12,600)
Net Cash flow from Operating activities		$6,200
Cash flows from investing activities		$0
Cash flows from financing activities		$0
Net change in cash		$6,200
Beginning Cash balance		$0
Ending Cash balance		$6,200

• [c]

Rent expense to be recognised in Year 2 is for 1 remaining months
= $ 12600 x 1/12
= $ 1050