Question

Establish an excel worksheet for the financial statement analysis framework. Refer to the following financial information;

1. On January 1, 2019, Frances Corp. started doing business and the owners contributed $200,000 capital in cash.
2. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2019 to December 31, 2020.
3. On March 1, 2019, MSK Inc. entered into a consulting contract under which Frances Corporation Contract under which Frances Corporation promised to provide consulting to MSK Inc. for the 10-month period from March 1, 2019 to December 31, 2019. In return, MSK promised to pay a monthly consulting fee of $15,000 which was to be paid in January, 2020. Frances fulfilled its contractual obligations during 2019.
4. On July 1, 2019, 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 proportion to the number of month’s usage.
5. Through November 30, 2019, the company had paid $66,000 to its employees for 11 months of salaries. Accrued salaries on December 31, 2019 were $6,000.
6. On December 31, 2019, Norbert Corporation advanced $20,000 to Frances Corporation for consulting services to be provided during 2020.

Questions:

1. For each transaction, using the financial statement effect template, analyze the effects of the above transactions of financial statement.
2. At the end of the year, analyze how the adjustment for accrual basis accounting affects the financial statement.
3. Prepare financial statements for the year ended December 31, 2019.
4. If Frances recognized ‘rent expense’ instead of ‘prepaid rent’ on January 1, discuss the effect of this error on the financial statement.

Answer 1

Rent
Rent paid	24,000
Period	24 months
Rent expense for 2019 (Jan to Dec)	12,000
Prepaid rent	12,000

Office Equipment closing balance Depreciation Calculation

Cost of office equipment	1,00,000
Useful life	5 years
depreciation from Jul to Dec'19 (100000/60 months*6 months)	10,000
Netbook value of the asset as at 3 Dec'19	90,000

Contracts with Customers

The corporation should account revenue on an accrual basis in the year 2019 even though not received during 2019.

Hence

Revenue would be (15,000X10 months) 150,000

Accounts receivable (15,000X10 months) 150,000

Salaries for the month of Dec'19 which is not paid in Dec'19 would be a current liability. Expenses should be accounted accrual basis in Dec'19

Advances received from customers for revenue relating to 2020 would be a current liability.

Other current liabilities
Salaries and wages payable	6000
Advances from customers	20000

Profit and loss statement of Frances for 31 Dec'19

Revenue	1,50,000
salaries and wages	72,000
Rent expense	12,000
Depreciation expense	10,000
Total	94,000
Profit	56,000

Balance Sheet of Frances Corp, as at 31, Dec 2019

EQUITY AND LIABILITIES			$
Shareholders’ funds
(a) Owner's capital			2,00,000
(b) Retained earnngs			56,000
			2,56,000
Current liabilities
(a) Other current liabilities
	Salaries and wages payable	6000
	Advances from customers	20000	26,000
			26,000
Total Equity and liabiliities			2,82,000
ASSETS
Non-current assets
(a) Office equipment
	Gross Block	1,00,000
	Less Acc depreciation	(10,000)	90,000
Current assets
(a) Accounts receivables			1,50,000
(c) Cash and cash equivalents			30,000
(d) Other current assets
	Prepaid rent		12,000
			1,92,000
Total Assets			2,82,000

iv) If Frances did not record rent paid as prepaid revenue, the following Gls would impact

In Profit and loss account

Rental expense increase by 12,000

Profit reduced by 12,000

In Balance sheet

Retained earnings reduced by 12,000

Prepaid rent reduced by 12,000