Question

E2-5 Determining Financial Statement Effects of Several Transactions LO2-3

Answer 1

Answer:

Event    Asset($ million   =  Liabilities ($ million)   +   Equity($ million)

A           + 52                                +52                                          -

B           +355                              -                                              +355      

C.           -                                    +145                                        -145

D.           -                                    -                                               -

E.            -                                   -                                                -

F.           -                                    -                                                 -

Explanation:

Transaction A involves four accounts:

Three assets account and one liability account.

In these three asset account, there was an increase in two (building and equipment) and decrease in the other (cash).

The net increase in asset equals = $52M  ($184M  +$270M -$402M)

This net increase in asset  always equals increase in liability(Note payable of $52M).

Transaction B involves three account:

Cash, common stock and stock premium.

Increase in Asset (cash) of $355M =    Increase in equity $355M (common stock $200M (100M x $2) + Stock premium (100M x $1.55) $155)

Transaction C involves transfer of Equity to Liability (Dividend is paid out of equity and since it remains payable, it becomes a liability.

Transaction D involves an increase in asset (short term investments) of $7,716M and a decrease in asset (cash) of $7,716M. The net effect is nil.

Transaction E does not have accounting impact on the entity, because it is a transaction between stockholders and potential stockholders.It has no accounting effect on the entity.

Transaction F involves a decrease in asset (short term investments) of $4,213M and an increase in asset (cash) of $4,213M. The net effect is nil.