Company X paid $12,000 of cash to a real estate company upon signing a lease on 12/31/07. The payments represents $4,000 security deposit and $4,000 rent for each of Jan. 08 and Feb. 08. Assume the correct accounting is to reflect both Jan. & Feb. '08 rent as prepaid, the most likely effect on X’s accounting equation in Dec. '07 is A. no net change in assets. B. a decrease in assets of $4,000 C. a decrease in assets of $8,000 D. a decrease in assets of $12,000 Which one and why? I saw all of them as cash outflow by the end of '07. A bit buffled here.
A. NO NET CHANGE! Cash -12k Deposit +4k PPE +8k - read the chart on pg. 66 they are paid for but UNUSED services, hence they are not expensed until the end of the month when they’ve used the service (rent for the month)
Correct. Cash decreases but the increase in prepaid expenses offsets that. No change.
Thanks to clear my mind. So this transaction should appear in balance sheet statement? What about statement of cash flows? It would be ($12,000), right?
hyang, yes it would be a $12,000 outlflow in CFO.
Cool. From the individual point of view, it’s sure a minus of asset.