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)
