solution

Effect of prepaid rent on the accounting equation and financial statements

The following events apply to 2012, the first year of operations of Sentry Services.

1. Acquired $45,000 cash from the issue of common stock.

2. Paid $18,000 cash in advance for one-year rental contract for office space.

3. Provided services for $36,000 cash.

4. Adjusted the records to recognize the use of the office space. The one-year contract started on May 1, 2012. The adjustment was made as of December 31, 2012.

Required

a. Write an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings.

b. Prepare an income statement and statement of cash flows for the 2012 accounting period.

c. Explain the difference between the amount of net income and amount of net cash flow from operating activities.

 
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