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Financial Accounting

Exercise 2-9A Prepaid items on financial statements

Therapy Inc. experienced the following events in 2013, its first year of operation:

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1.  Performed counseling services for $18,000 cash.

2.  On February 1, 2013, paid $12,000 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

b. Prepare an income statement, balance sheet, and statement of cash flows for the 2013 accounting period. 

c. Ignoring all other future events, what is the amount of rent expense that would be recognized in 2014? 

Exercise 2-14A Supplies, unearned revenue, and the financial statements model.

Ross, Attorney at Law, experienced the following transactions in 2013, the first year of operations:

1.  Purchased $1,500 of office supplies on account.

2.  Accepted $36,000 on February 1, 2013, as a retainer for services to be performed evenly over the next 12 months.

3.  Performed legal services for cash of $84,000.

4.  Paid cash for salaries expense of $32,000

5.  Paid a cash dividend to the stockholders of $8,000.

6.  Paid $1,200 of the amount due on accounts payable. 

7.  Determine that at the end of the accounting period, $150 of office supplies remained on hand.

8.  On December 31, 2013, recognized the revenue that had been earned for services performed in accordance with Transaction 2.


Show the effects of the events on the financial statements using a horizontal statements model like the following one.  In the Cash Flow 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. 


Exercise 2-24A – 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 the effects of the event. 


a. Acquired $60,000 cash from the issue of common stock.

b. Earned $20,000 of revenue on account.  Collected $15,000 cash from accounts receivable.

c. Paid $4,800 cash on October 1 to purchase a one-year insurance policy.

d. Collected $12,000 in advance for services to be performed in the future.  The contract called for services to start on August 1 and to continue for one year.

e. Accrued salaries amounting to $5,000.

f. Sold land that cost $15,000 for 15,000 cash.

g. Provided services for $9,200 cash

h. Purchased $2,000 of supplies on account.  Paid $1,500 cash on accounts payable.  The ending balance in the Supplies account, after adjustment, was $800.00.

i. Paid cash for other operating expenses of $2,200.

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