Establish an Excel Worksheet for the financial statement analysis framework. Ref

Question

Establish an Excel Worksheet for the financial statement analysis framework. Refer to the following information:

a. On January 1, 2014, Frances Corporation started doing business and the owners contributed $200,000 capital in cash.

b. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2014 to December 31, 2015.

c. On March 1, 2014, MSK Inc. entered into a consulting contract under which Frances Corporation promised to provide consulting to MSK Inc. for the 10-month period from March 1, 2014, to December 31, 2014. In return, MSK promised to pay a monthly consulting fee of $15,000, which was to be paid in January 2015. Frances fulfilled its contractual obligation during 2014.

d. On July 1, 2014, Frances purchased office equipment for $100,000 cash. The equipment has an estimated useful life of five years and no salvage value. The equipment was immediately placed into use. Frances uses the straight-line method of depreciation. It records depreciation expense in proportion to the number of months’ usage.

e. Through November 30, 2014, the company had paid $66,000 to its employees for 11 months of salaries. Accrued salaries on December 31, 2014, were $6,000.

f. On December 31, 2014, Norbert Corporation advanced $20,000 to Frances Corporation for consulting services to be provided during 2015.

Questions: 1. For each of these transactions, using the financial statement effect template, analyze the effects of the above transactions on financial statements.

2. At the end of the year, analyze how the adjustment for accrual basis accounting affects the financial statements.

3. Prepare financial statements for the year ended December 31, 2014.

4. If Frances recognized "rent expense" instead of "prepaid rent" on Jan. 1, discuss the effect of this error on the financial statements.

Explanation / Answer

1 & 2) EFFECT OF TRANSACTIONS ON FINANCIAL STATEMENTS AND ADJUSTMENTS FOR ACCRUAL ACCOUNTING: ASSETS EQUALS LIABILITIES AND SHAREHOLDERS EQUITY Transaction Cash Prepaid Rent Equipment EQUALS Accounts Payable Salary payable Unearned revenue Capital Expenses DETAILS a 200000 EQUALS 200000 b -24000 24000 EQUALS c EQUALS 150000 -150000 Consulting Fees d -100000 100000 EQUALS e -66000 EQUALS 6000 -72000 f 20000 EQUALS 20000 Adjusting Entries: EQUALS b (rent expense) -12000 EQUALS -12000 d (depreciation) -10000 EQUALS -10000 For six months TOTAL 30000 12000 90000 EQUALS 150000 6000 20000 200000 -244000 GROSS TOTAL 132000 EQUALS 132000 3) Financial Statements: BALANCE SHEET : LIABILITIES AND SH EQ. Amounts $ ASSETS Amounts $ Accounts Payable 150000 Cash 30000 Salary Payable 6000 Prepaid rent 12000 Unearned Revenue 20000 Equipment 90000 Capital 200000 Expenses 244000 Total Liabilities 376000 Total Assets 376000 4) If under transaction b, Rent expense is booked, then an adjustment for Prepaid rent for the year 2015 has to be made, which should be: Debit Prepaid Rent 12000 Credit Rent Expense 12000

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