Question

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation?

Answer 1

Answer:

Machinery asset increase by $320,750

Total asset increase by $315,000

Total liabilities increase by $315,000

Explanation:

As we know that

Accounting equation is

Total assets = Total liabilities + stockholder equity

Since the industrial veneer cutter is purchased for

= Note payable + transportation cost + installation cost

= $315,000 + $5,000 + $750

= $320,750

There is a cash outflow of $5,000 + $750 i.e $5,750 which decrease the assets

But at the same time it also increased the assets by

= $320,750 - $5,750

= $315,000

And, since there is a note payable for $315,000 which also increased the liabilities