Question

The following transactions occurred during March 2013 for the Wainwright Corporation. The company owns and operates a wholesale warehouse.
1. Issued 30,000 shares of common stock in exchange for $300,000 in cash.
2.
Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable was signed for the balance owed.

3. Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.
4. Credit sales for the month totaled $120,000. The cost of the goods sold was $70,000.
5. Paid $5,000 in rent on the warehouse building for the month of March.
6.
Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2013.

7. Paid $70,000 on account for the merchandise purchased in 3.
8. Collected $55,000 from customers on account.
9. Recorded depreciation expense of $1,000 for the month on the equipment.



Required:
Analyze each transaction and show the effect of each on the accounting equation for a corporation. (Amounts to be deducted should be indicated by a minus sign. Enter the net change on the accounting equation.)

ASSETS = Liabilities + Paid-in Capital + Retained Earnings

1

2

3

4

5

6

7

8

9

Answer 1

Answer:

Wainwright Corporation

ASSETS = Liabilities + Paid-in Capital + Retained Earnings

1 . Assets (Cash) increase $30,000 = Liabilities + Paid-in Capital increase $30,000 + Retained Earnings

2 . Assets (Equipment) increase $40,000 and (Cash) decrease -$10,000 = Liabilities increase $30,000 + Paid-in Capital + Retained Earnings

3 . Assets (Inventory) increase $90,000 = Liabilities (Notes Payable) increase $90,000 + Paid-in Capital + Retained Earnings

4 . Assets (Inventory) decrease -$70,000 + (Accounts Receivable) increase $120,000 = Liabilities + Paid-in Capital + Retained Earnings increase $50,000

5 . Assets (Cash) decrease -$5,000 + (Insurance Prepaid) increase $5,000= Liabilities + Paid-in Capital + Retained Earnings

6 . Assets (Cash) decrease -$6,000 = Liabilities + Paid-in Capital + Retained Earnings -$6,000

7. Assets (Cash) decrease -$70,000 = Liabilities (Accounts Payable) decrease -$70,000 = Paid-in Capital + Retained Earnings

8 . Assets (Cash) increase $55,000 and decrease (Accounts Receivable) -$55,000 = Liabilities + Paid-in Capital + Retained Earnings

9. Assets (Equipment) decrease -$1,000 = Liabilities + Paid-in Capital + Retained Earnings decrease -$1,000.

Explanation:

a) The accounting equation states that Assets are equal to Liabilities Plus Paid-in Capital Plus Retained Earnings.  This equation is very important in accounting as it keeps the two sides of the balance sheet in balance.  The equation shows that assets are funded by liabilities or equity or profits from operation.

b) When common stock is issued for cash, Assets increase and Paid-in Capital increase.

c) The purchase of equipment increases Assets by $40,000 and decreases Assets by $10,000 (for cash payment) and increases Liabilities by $30,000 as note payable.

d) Assets increase by $90,000 with inventory purchased on account and Liabilities (Accounts Receivable) increases by the same amount.

e) Payments for Rent for March will decrease Assets (Cash) and decrease Retained Earnings.

f) The Insurance cost of $6,000 paid in advance will decrease Assets (Cash) and increase Assets (Insurance Prepaid) without affecting the other side of the equation.

g) Depreciation expense also decreases Assets (Equipment) and decreases the Retained Earnings by $1,000 respectively.