Life, Inc. experienced the following events in Year 1, its first year of operation: 1. Performed counseling services for $20,400 cash. 2. On February 1, Year 1, paid $13,800 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 under an accounting equation.
b. Prepare an income statement, balance sheet, and statement of cash flows for the year accounting period.
c. Ignoring all other future events, what is the amount of rent expense that would be recognized in nex year?

a.

Accounting Equation

  Event                    Assets    =     Equity       +      Liability

1. Services             +$20,400     +$20,400

2. Rent Payment   -$13,800

                              +$13,800          

3. Adjustment        -$12,650       -$12,650

b.

Income Statement

Revenue       $20,400

Expenses      $12,650

Net Income    $7,750

Balance Sheet

Assets

Prepaid Rent                       $1,150

Cash                                    $6,600

Total Assets                        $7,750

Equity and Liability

Equity (Retained Earning)   $7,750

Liabilities                              $0      

Total Assets                         $7,750

Statement of cash flow

Cash flow from Operating activities

Net profit                              $7,750

Increase in receivable        ($1,150)

Net Operating Cash flow    $6,600

Net Investing Cash flow      $0,000

Net Financing Cash flow     $0,000

Total Net cash flow              $6,600

Opening cash balance        $0,000

Closing cash balance          $6,600

c.

Year 1 Rent Expense = $13,800 x ( 11 / 12 ) = 12,650

Rent Expense Expense to recognized next year = Prepaid Rent = $1,150

Explanation:

* Year end is December 31, Year 1

As 11 months passed from February 1, Year 1 and expense of these months has been accrued, so only one months rent remains prepaid.

Prepaid rent  = $13,800 - $12650 = $1,150

Cash = $20,400 - 13,800 = $6,600