Question

Bryant Company sells a wide range of inventories, which are initially purchased on account. Occasionally, a short-term note payable is used to obtain cash for current use. The following transactions were selected from those occurring during the year.
a. On January 10, purchased merchandise on credit for $30,000. The company uses a perpetual inventory system.
b. On March 1, borrowed $64,000 cash from City Bank and signed a promissory note with a face amount of $64,000, due at the end of six months, accruing interest at an annual rate of 8.50 percent, payable at maturity.

Required:
For each of the transactions, indicate the accounts, amounts, and effects on the accounting equation.

Answer 1

Answer:

Finance charge = $2,720

Transaction a: This increases assets by $30,000 and also the liabilities by $30,000.

Transaction b: This increases assets by $64,000, increases liabilities by $66,720, but reduces Stockholder's Equity by $2,720.

Explanation:

Note: See the attached excel file for the accounting equation.

In the attached excel file, the finance charge of $2,720 is calculated as follows:

Finance charge = Amount borrowed * Interest rate * (Number of months the promissory will due / Number of months in a year) = $64,000 * 8.50% * (6 / 12) = $2,720

The effect of each transaction on the accounting equation are discussed below:

Transaction a: This increases assets by $30,000 and also the liabilities by $30,000.

Transaction b: This increases assets by $64,000, increases liabilities by $66,720, but reduces Stockholder's Equity by $2,720.