Life, Inc. experienced the following events in Year 1, its first year of operation: Performed counseling services for $22,000 cash. On February 1, Year 1, paid $15,000 cash to rent office space for the coming year. 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.
TABLE PROVIDED BELOW
a.
Life, Inc.
Effect of Events on the Accounting Equation
Assets = Stockholders’ Equity
Event
Cash
Prepaid Rent
=
Retained Earnings
1. Performed Services 36,000 36,000
2. Prepaid Rent (18,000) 18,000 NA
3. Used Rent (18,000) (18,000)
Totals 18,000 0 = 18,000
b. Prepare an income statement, balance sheet, and statement of cash flows for the 2016 accounting period.
Life, Inc.
Income Statement
For the Year Ended December 31, 2016
Revenue 36,000
Expense 18,000
Net Income 18,000

a. Assets = Liabilities + Stockholders' Equity = $8,250

b. We have:

Net income = $8,250

Assets = Liabilities + Stockholders' Equity = $8,250

Ending cash balance = $7,000

Explanation:

Note: The data in this question are merged together and the question also contains some errors in terms of irrelevant data and date/year inconsistency. These errors are therefore fixed by picking the actual question with the sorted data before answering the question as follows:

Life, Inc. experienced the following events in Year 1, its first year of operation:

1. Performed counseling services for $22,000 cash.

2. On February 1, Year 1, paid $15,000 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 under an accounting equation.

b. Prepare an income statement, balance sheet, and statement of cash flows for the Year 1 accounting period.

The explanation of the answer is now presented as follows:

a. Record the events under an accounting equation.

Note: See Part a of the attached excel file for the record of the events under an accounting equation.

From Part of the attached excel file, we have:

Use rent = Rent paid = (Number of months used in Year 1 / Number of months in a year) = $15,000 * (11 / 12) = $13,750

Assets = Cash + Prepaid rent = $7,000 + $1,250 = $8,250

Liabilities = $0

Stockholders' Equity = $8,250

Therefore, we have:

Assets = Liabilities + Stockholders' Equity = $8,250

b. Prepare an income statement, balance sheet, and statement of cash flows for the Year 1 accounting period.

Note: See Part b of the attached excel file for the income statement, balance sheet, and statement of cash flows for the Year 1 accounting.

From Part of the attached excel file, we have:

Net income = $8,250

Assets = Liabilities + Stockholders' Equity = $8,250

Ending cash balance = $7,000

Note:

Increase in prepaid rent = Rent expense to be recognized in Year 2 = Rent paid - Rent used = $15,500 - $13,750 = $1,250

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