Question

Brown Company’s December 31, Year 1 balance sheet showed $1,800 cash, $200 accounts payable, $600 common stock, and $1,000 retained earnings. The company experienced the following events during year 2.
(1) On April 1, Year 2 the company paid $1,800 cash to rent office space for the coming year starting immediately.
(2) Earned $1,700 cash revenue.
(3) Paid a $300 cash dividend.
Required:
a. Based on this information, the company would report:
O $1,350 balance in a prepaid rent account on the Year 2 balance sheet.
O a $1,050 balance in retained earnings on the Year 2 balance sheet.
O a $1,700 net cash outflow from operating activities on the Year 2 statement of cash flows.
O All of the answers are correct.

Answer 1

Answer:

Correct answer is $1,050 balance in retained earnings on the year 2 balance sheet

Explanation:

Retained earnings has a beginning amount of $1,000, then we incurred $1,700 revenue less the expense incurred in rent in the amount of $1,350 (1,800 / 12 months x 9 months). Then the company paid $300 dividends fro the year that is a deduction to the retained earnings balance.

Retained earnings beginning,            $1,000

Add: Revenue                                        1,700

Less: Rent expense (expired portion)  1,350

Total                                                     $1,350

Less : Dividends                                      300

Total ending balance of retained earnings $1,050

*Prepaid rent balance at the end of year 2 is $450 ($1,800 - ($1,800 / 12 months x 9 months)

*Cash outflow from operating is not $1,700 because it is an inflow of cash from the revenue