Question 1
Exercise 2-9A Prepaid items on financial statementTherapy Inc.
experienced the following events in 2013, its first year of
operation: 1. Performed counseling services for $18,000 cash. 2. On
February 1, 2013, paid $12,000 cash to rent office space for the
coming year. 3. Adjusted the accounts to reflect e amount of rent
used during the year.RequiredBased on this information alone a.
Record the events under an accounting equation b. Prepare an income
statement, balance sheet, and statement of cash flows for the 2013
accounting period. c. Ignoring all other future events, what is the
amount of rent expense that would be recognized in 2014?Solution:
a. Record the events under an accounting equation
1. Performed counseling services for $18,000 cash.
Cash18,000Service Revenue18,000
2. On February 1, 2013, paid $12,000 cash to rent office space
for the coming year.
Prepaid Rent12,000Cash12,000
3. Adjusted the accounts to reflect e amount of rent used during
the year.
Rent Expense11,000Prepaid Rent11,000
Asset=Owner's Equity+Liabilities
1)$18,000 (Increase)=$18,000(Increase)+No Effect
2)$12,000(Increase)=No Effect+No Effect$12,000(Decrease)
3)$11,000(Decrease)=$11,000(Decrease)+No Effect
b. Prepare an income statement, balance sheet, and statement of
cash flows for the 2013 accounting period.
Therapy Inc.Income StatementFor the Year Ended December 31,
2013REVENUEService Revenue18,000EXPENSESRent Expense11,000
Net Income7,000
Therapy Inc.Balance SheetAs at December 31, 2013CURRENT
ASSETCash6,000Prepaid Rent1,000
TOTAL ASSETS7,000
EQUITY & LIABILITIES
Owner's Equity7,000
TOTAL EQUITY & LIBILITIES7,000
Therapy Inc.Statement of Cash FlowFor the Year Ended December
31, 2013
Cash Receipt from the customers18,000Cash paid to suppliers or
expenses12,000
Net Cash Generated From Operations6,000 c. Ignoring all other
future events, what is the amount of rent expense that would be
recognized in 2014?
Rent is paid on Feb 01, 2013, for the coming year out of which
$11,000 is recognized as an expense in the year 2013. therefore,
only 1,000 is available as prepaid rent which has to be recognized
as an expense in the year 2014.
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