. Identify the direction of change (increase, decrease, or NA) and the amount of the change.

Exercise 2-15A

Prepaid items on financial statements

Life, Inc., experienced the following events in 2016, its first year of operation:

1. Performed counseling services for $36,000 cash.

2. On February 1, 2016, 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.


Based on this information alone:

a. Record the events under an accounting equation.





Life, Inc.

Effect of Events on the Accounting Equation

  Assets = Stockholders’ Equity




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 = 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  





Life, Inc.

Balance Sheet

As of December 31, 2016

        Cash 36,000    
        Prepaid Rent 18,000    
  Total Assets 54,000    
  Liabilities (18,000)    
  Stockholders’ Equity      
        Retained Earnings      
  Total Stockholders’ Equity      
  Total Liab. and Stockholders’ Equity      

EXERCISE 2-15A b. (cont.)


Life, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2016

  Cash Flows From Operating Activities:      
     Cash Receipt from Revenue      
     Cash Payment for Rent      
  Net Cash Flow from Operating Activities      
  Cash Flows From Investing Activities      
  Cash Flows From Financing Activities:      
  Net Change in Cash      
  Plus: Beginning Cash Balance      
  Ending Cash Balance      


c. Ignoring all other future events, what is the amount of rent expense that would be recognized

in 2017?




Exercise 2-19A on page 111

Exercise 2-19A Supplies, unearned revenue, and the financial statements model

Hart, Attorney at Law, experienced the following transactions in 2016, the first year of


1. Accepted $36,000 on April 1, 2016, as a retainer for services to be performed evenly over the

next 12 months.

2. Performed legal services for cash of $54,000.

3. Purchased $2,800 of office supplies on account.

4. Paid $2,400 of the amount due on accounts payable.

5. Paid a cash dividend to the stockholders of $5,000.

6. Paid cash for operating expenses of $31,000.

7. Determined that at the end of the accounting period $200 of office supplies remained on


8. On December 31, 2016, recognized the revenue that had been earned for services performed

in accordance with Transaction 1.


Show the effects of the events on the financial statements using a horizontal statements model

like the following one. In the Cash Flows column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, and NC for net change in cash. Use NA

to indicate accounts not affected by the event. The first event has been recorded as an example.


Assets 5 Liabilities 1 Stk. Equity

No. Cash 1 Supplies 5 Accts. Pay 1 Unearn. Rev. 1 Ret. Earn. Rev. 2 Exp. 5 Net Inc. Cash Flow

1. 36,000 1 NA 5 NA 1 36,000 1 NA NA 2 NA 5 NA 36,000 OA





Hart Attorney At Law

Effect of Transactions on the Financial Statements for 2016

    Balance Sheet   Income Statement   Statement of
    Assets = Liabilities + S. Equity   Rev Exp. = Net Inc.   Cash Flows










Accts. Payable  


Unearn. Rev.  




1.     +   =   +   +         =      
2.     +   =   +   +         =      
3.     +   =   +   +         =      
4.     +   =   +   +         =      
5.     +   =   +   +         =      
6.     +   =   +   +         =      
7.     +   =   +   +         =      
8.     +   =   +   +         =      
Totals   51,600 + 200 = 400 + 9,000 + 42,400   81,000 33,600 = 47,400   51,600  NC
















Exercise 2-27A Effect of accounting events on the income statement and statement

of cash flows


Explain how each of the following events or series of events and the related adjusting entry will

affect the amount of net income and the amount of cash flow from operating activities reported

on the year-end financial statements. Identify the direction of change (increase, decrease, or NA)

and the amount of the change. Organize your answers according to the following table. The first

event is recorded as an example. If an event does not have a related adjusting entry, record only

Cash Flows from

Net Income Operating Activities

Event/ Direction of Amount of Direction of Amount of

Adjustment Change Change Change Change

a NA NA Decrease $9,000

Adj Decrease $2,250 NA NA

a. Paid $9,000 cash on October 1 to purchase a one-year insurance policy.

b. Purchased $2,000 of supplies on account. Paid $500 cash on accounts payable. The ending

balance in the Supplies account, after adjustment, was $300.

c. Provided services for $10,000 cash.

d. Collected $2,400 in advance for services to be performed in the future. The contract called for

services to start on May 1 and to continue for one year.

e. Accrued salaries amounting to $5,600.

f. Sold land that cost $3,000 for $3,000 cash.

g. Acquired $15,000 cash from the issue of common stock.

h. Earned $12,000 of revenue on account. Collected $8,000 cash from accounts receivable.

i. Paid cash operating expenses of $4,500.

e. Paid cash for rent expense.

f. Performed services for cash.

g. Performed services for clients on account.

h. Collected cash from accounts receivable.

i. Received cash for services to be performed in the future.

j. Purchased land with cash.




Net Income

Cash Flow from

Operating Activities



Direction of Change Amount of Change Direction of Change Amount of Change
a. Event


b. Event


b.   Event

No adj.

d. Event


e.  Event

No adj.

f.   Event

No adj.

f.       Event

No adj.

g.   Event

No adj.

h.   Event

No adj.






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