Question

Life, Inc. experienced the following events in Year 1, its first year of operation: 1. Performed counseling services for $36,000 cash. 2. On February 1, Year 1, 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 in accounts under an accounting equation. (Enter any decreases to account balances with a LIFE, INC. Effect of Events on the Accounting Equation Assets Event Stockholders' Equity Retained Earnings Cash + Prepaid Rent + 1. Performed services 2. Prepaid rent 3. Used rent Totals III + +

Answer 1

Requirement a:

LIFE Inc
Effects of events on the accounting equation
Event		Assets			=	Stockholders equity
		Cash	+	Prepaid rent	=	Retained earnings
1	Performed services	$         36,000	+		=	$         36,000
2	Prepaid rent	$       (18,000)	+	$         18,000	=
3	Used rent		+	$       (16,500)	=	$       (16,500)
Totals		$         18,000	+	$            1,500	=	$         19,500

Note: Rent expense = 18000*11/12 = 16500

Requirement b:

LIFE Inc
Income statement
For the year ended December 31, year 1
Performed services	$       36,000
Rent expense	$     (16,500)
Net income	$       19,500

LIFE Inc
Balance sheet
As of December 31, year 1
Assets
Cash	$       18,000
Prepaid rent	$         1,500
Total current assets	$       19,500
Total assets		$         19,500
Liabilities		$                  -
Stockholders equity
Common stock	$                -
Retained earnings	$       19,500
Total stockholders equity	$       19,500
Total liabilities and stockholders equity		$         19,500

LIFE Inc
Statement of cashflows
For the year ended December 31, year 1
Cash flows from operating activities:
Net income	$       19,500
Changes in operating assets and liabilities:
Increase in prepaid rent	$       (1,500)
Net cash flow from operating activities		$         18,000
Cash flows from investing activities		$                  -
Cash flows from financing activities		$                  -
Net change in cash		$         18,000
Beginning Cash balance		$                  -
Ending cash balance		$         18,000

Requirement c:

Rent expense to be recognised in Year 2

$         1,500

18000*1/12