EXERCISE 3-15A

Exercise 3-15A Recording prepaid items and identifying their effect on financial

statements

Cherokee Company began operations when it issued common stock for $80,000 cash. It paid

$60,000 cash in advance for a one-year contract to lease delivery equipment for the business. It

signed the lease agreement on March 1, 2016, which was effective immediately. Cherokee received

$98,000 of cash revenue in 2016.

Required

a. Record the March 1 cash payment in general journal format.

b. Record in general journal format the adjustment required as of December 31, 2016.

c. Record all events in a horizontal statements model like the following one:

Assets 5 Liab. 1 Equity Rev. 2 Exp. 5 Net Inc. Cash Flow

Prep. Common Ret.

Cash 1 Rent 5 Stock 1 Earn.

d. What amount of net income will Cherokee Company report on the 2016 income statement?

What is the amount of net cash flow from operating activities for 2016?

e. Determine the amount of prepaid rent Cherokee Company would report on the December 31,

2016, balance sheet.