Question

Prepaid items on financial statements

Answer 1

Answer:

a. Record the events under an accounting equation (I divided the accounting equation in 2)

      assets                               = liabilities       +     equity

      cash        prepaid rent

1)     18,000          0                         0                     18,000

2)   -12,000    12,000

3)        0         -11,000                      0                    -11,000

     revenue  -  expenses  =  net income         cash flow  type

1)    18,000              0               18,000               18,000       OA

2)        0                  0                  0                     -12,000      OA

3)        0              11,000           -11,000                  0             OA

b. Prepare an income statement, balance sheet, and statement of cash flows for the 2013 accounting period.

Therapy Inc.

Income Statement

For the year ended December 31, 2013

Service revenue    $18,000

Rent expense       ($11,000)

Net income            $7,000

Therapy Inc.

Income Statement

For the year ended December 31, 2013

Assets:

Cash $6,000

Prepaid rent $1,000

Total assets $7,000

Liabilities $0

Equity

Retained earnings $7,000

Total liabilities and equity $7,000

Therapy Inc.

Cash Flow Statement

For the year ended December 31, 2013

Cash flows from operating activities

Net income                                 $7,000

Adjustments to net income:

Increase in prepaid rent           ($1,000)

Net cash flow from operating activities $6,000

Cash flows from investing activities:           $0

Cash flows form financing activities:          $0  

Net increase in cash                               $6,000

Beginning cash balance                                $0

Ending cash balance                              $6,000

c. Ignoring all other future events, what is the amount of rent expense that would be recognized in 2014?

If they continue to rent the same office, the rent expense for 2014 should be $12,000 (assuming that rent didn't change)