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2 October, 14:48

Brown Company's December 31, Year 1 balance sheet showed $1,800 cash, $200 accounts payable, $600 common stock, and $1,000 retained earnings. The company experienced the following events during year 2.

(1) On April 1, Year 2 the company paid $1,800 cash to rent office space for the coming year starting immediately.

(2) Earned $1,700 cash revenue.

(3) Paid a $300 cash dividend.

Required:

a. Based on this information, the company would report:

O $1,350 balance in a prepaid rent account on the Year 2 balance sheet.

O a $1,050 balance in retained earnings on the Year 2 balance sheet.

O a $1,700 net cash outflow from operating activities on the Year 2 statement of cash flows.

O All of the answers are correct.

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Answers (1)
  1. 2 October, 18:05
    0
    Correct answer is $1,050 balance in retained earnings on the year 2 balance sheet

    Explanation:

    Retained earnings has a beginning amount of $1,000, then we incurred $1,700 revenue less the expense incurred in rent in the amount of $1,350 (1,800 / 12 months x 9 months). Then the company paid $300 dividends fro the year that is a deduction to the retained earnings balance.

    Retained earnings beginning, $1,000

    Add: Revenue 1,700

    Less: Rent expense (expired portion) 1,350

    Total $1,350

    Less : Dividends 300

    Total ending balance of retained earnings $1,050

    *Prepaid rent balance at the end of year 2 is $450 ($1,800 - ($1,800 / 12 months x 9 months)

    *Cash outflow from operating is not $1,700 because it is an inflow of cash from the revenue
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