Note:The net income line from the income statement is transferred down to the retained earnings section of the balance sheet.  Remember, net income increases retained earnings, and net income is the link between the income statement and balance sheet. This is an excellent study/review problem because it requires an understanding of much of the material that has been presented to this point in the course. 

a.Calculation for item c:

$9,600 Notes payable * 10% interest rate * 1/12 =$80 accrued interest, one month. Thus, the $160 preliminary balance in the Interest Payable account makes sense because it represents interest for two months on the note payable that had been accrued between the last interest payment date (May 31) and the end of last month (July 31).

Calculation for item e:

Too much was recorded as Rent Expense in August because the $2,040 rent payment included a prepayment of the rent for September and October.  Thus, the Prepaid Rent (asset) account should be debited for $1,360 (2/3 * $2,040), and the Rent Expense account should be credited for the same amount.