Question

Life, Inc., experienced the following events in 2018, its first year of operation.

1. Performed counseling services for $22,000 cash.
2. On February 1, 2018, paid $18,000 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 2016 accounting period.
C. Ignoring all other future events, what is the amount of rent expense that would be recognized in 2017?

Answer 1

Life, Inc.

A. Recording the events under the accounting equation:

Debit Cash Account (Assets) $22,000

Credit Service Revenue (Equity) $22,000

To record the receipt of cash for counseling services performed.

Debit Prepaid Rent (Assets) $18,000

Credit Cash Account (Assets) $18,000

To record the payment of cash for office space.

Debit Rent Expense (Equity) $16,500

Credit Prepaid Rent (Assets) $16,500

To record the rent expense for the year.

B. Life, Inc. Income Statement for the year ended December 31, 2018:

Service Revenue $22,000

Rent expense 16,500

Net Income $5,500

C. The amount of rent expense to be recognized in 2019 is $18,000.

Step-by-step explanation:

a) Data and Calculations:

Service Revenue = $22,000

Prepaid Rent = $18,000 (from February 1, 2018 to January 31, 2019)

Rent Expense for 2018 = $16,500 ($18,000 * 11/12)

b) The accounting equation is Assets = Liabilities + Equity. The equation shows that every business transaction affects the assets, liabilities, and equity. This is why it is always in balance with every given transaction.