Question

Evaluate each of the following transactions in terms of their effect on assets, liabilities, and equity. 1. Buy $15,000 worth of manufacturing supplies on credit 2. Issue $85,000 in stock 3. Borrow $63,000 from a bank 4. Pay $5,000 owed to a supplier 5. Receive payment of $12,000 owed by a customer 6. Purchase equipment for $44,000 in cash 7. Pay $7,000 owed to a supplier What is the net change in Total Liabilities

Answer 1

The effects of the above transactions are shown below:

• 1. Asset increase and Liabilities increase.
• 2. Asset increase and Equity increase.
• 3. Asset increase and liabilities increase.
• 4. Asset decrease and liabilities decrease.
• 5. No change
• 6. No change.
• 7. Asset decrease and liabilities decrease.
• 8. Liabilities increase by $66,000.

Effects on Company financials

Supplies are an asset and buying things on credit means incurring a liability so both these increase.

Cash will increase as a result of more Equity being issued. Equity will also increase.

Cash will increase as a result of the loan. As the company now owes the bank money, this is a liability.

The cash used to pay the supplier will lead to cash decreasing. Liabilities will decrease because the supplier was paid.

Cash from the payment by the customer, the cash owed by the customer, the cash used to pay for the equipment, and the equipment, are all assets so there will be no change.

The cash used to pay the supplier will lead to cash decreasing. Liabilities will decrease because the supplier was paid.

Change in liabilities will be:

= 15,000 + 63,000 - 5,000 - 7,000

= $66,000

In conclusion, the change in liabilities is a gain of $66,000.

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