Question

The following events occurred for Favata Company: Received $16,000 cash from owners and issued stock to them. Borrowed $13,000 cash from a bank and signed a note due later this year. Bought and received $1,400 of equipment on account. Purchased land for $24,000; paid $2,200 in cash and signed a long-term note for $21,800. Purchased $9,000 of equipment; paid $2,200 in cash and charged the rest on account. Required: For each of the events (a) through (e), perform transaction analysis and indicate the account, amount, and direction of the effect on the accounting equation. (Enter any decreases to account balances with a minus sign.)

Answer 1

Answer:

(a) + Cash Increase in Assets $16,000 = Liabilities No effect + Stockholders Equity $16,000

(b) + Bank Account Increase in Assets $13,000 = + Borrowings Increase in Liabilities $13,000, No effect on Stockholder's Equity

(c) + Equipment Increase in Asset $1,400 = + Accounts Payable Increase in Liability $1,400, No effect on Stockholder's Equity.

(d) Increase in Assets $21,800 = Increase in Liability $21,800

(e) Increase in Assets $6,800 = Increase in Liability $6,800

Explanation:

(a) Received $16,000 cash from owners and issued stock to them.

Cash received shall increase the cash account in assets by the same i.e. $16,000.

At the same time stock is issued thus, common equity will increase, i.e. Increase in Stockholder's Equity by $16,000

(b) Borrowed $13,000 cash from a bank and signed a note due later this year.

This will increase funds in form of cash and bank balance, basically bank account, i.e. Increase in Asset by $13,000.

This will equally increase as a current liability in the form of notes payable, i.e. increase in liabilities by $13,000.

(c) Bought and received $1,400 of equipment on account.

Since equipment is bought it will increase equipment by $1,400, i.e. an increase in asset.

Also it is bought on account. Thus, liability in accounts payable shall increase by the same $1,400.

(d) Purchased land for $24,000; paid $2,200 in cash and signed a long-term note for $21,800.

This will increase land by $24,000, and decrease cash by $2,200. This will have net impact of increase in assets of $21,800.

Further there is increase in liability of $21,800 which is long term in nature.

(e) Purchased $9,000 of equipment; paid $2,200 in cash and charged the rest on account.

Since equipment is purchased, it will increase equipment account and will decrease cash, on a net effect assets will increase by $9,000 - $2,200 = $6,800.

further liabilities in the form of account payable will increase, by $6,800.