Therapy Inc. experienced the following events in 2014, its first year of operati

Question

Therapy Inc. experienced the following events in 2014, its first year of operation: 1. Performed counseling services for $18,000 cash. 2. On February 1, 2014, 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. Required Based on this information alone a. Record the events under an accounting equation. (Do not round intermediate calculations. Enter any decreases to account balances with a minus sign.) THERAPY INC. Effect of Events on the Accounting Equation Stockholders Assets Equity Event Prepaid Rent H Earnin Retained Cash 1. Performed services 18,000 (12,000) 2. Prepaid rent 3. Used rent Totals 6,000

Explanation / Answer

Accounting Equation Assets= Liabilities+ Shareholders' Equity a. Assets = Liabilities+ SH. Equity 1 18000 18000 (Cash &Revenue Increases) 2 -12000 (Cash decreases &Prepaid expense Increases) 12000 3 -11000 -11000 Prepaid exp.decreases & Revenue decreases as rent is expensed in the Income statement Total 7000 7000 b-1. Income Statement Counselling services Revenue 18000 Less : Rent Expense 11000 Net Income 7000 b-2 Balance sheet Assets Cash 6000 Prepaid-rent 1000 Total Assets 7000 Liabilities& Equity Equity 7000 Total liabilities& Equity 7000 Statement of Cash flows Net income as per Income Statement 7000 Less: Increase in Current Assets: Prepaid Rent 1000 Net Cash flow from operating acivities 6000 Cash flow from Investing acivities 0 Cash flow from Financing acivities 0 Net Change in cash 6000 Ending Cash balance 6000

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