PROBLEM 2.14 Effects of transactions on assets, liabilities and shareholders\' e

Question

PROBLEM 2.14 Effects of transactions on assets, liabilities and shareholders' equity What is the effect on assets, liabilities and shareholders' equity of each of the following transactions? Use the notations 'increase', 'decrease' or 'no effect 1 Owners of the company contribute motor vehicles in return for additional shares. 2 Receive payment from accounts receivable. 3 Purchase equipment for cash 4 Issue shares to pay off a long-term loan. 5 Pay amounts owed to accounts payable. Sell inventory for cash at a price higher than its cost. Purchase inventory on credit. Pay salaries to employees. 6 7 8

Explanation / Answer

1) Owner contribute motor vehicle in return for additional shares

Shareholder's Equity = Increase due to increase in Owner's capital

Assets = Increase due to receipt of motor vehicle (Fixed Asset)

Liabilities = No Effect

2) Receive payment from Accounts Receivable

Assets = No Effect (because cash will increase and Accounts receivable will decrease with the same amount, hence total assets will remain same)

There is also no effect on Liabilities and Shareholder's Equity.

3) Purchase Equipment for cash

Assets = No Effect (because cash will decrease and Equipment will increase with the same amount, hence total assets will remain same)

There is also no effect on Liabilities and Shareholder's Equity.

4) Issue Shares to pay off a long term loan

Liabilities = Decrease (due to decrease in long term loan)

Shareholder's Equity = Increase

Assets = No Effect

5) Pay Amounts owed to Accounts Payable

Liabilities = Decrease (due to decrease in accounts payable)

Assets = Decrease (due to decrease in cash)

Shareholder's Equity = No Effect

6) Sell Inventory for cash at a price higher than its cost

Assets = Increase (Increase in cash is more whereas decrease in inventory is for a less amount)

Shareholder'S Equity = Increase (with the amount of profit on sale of inventory)

Liabilities = No Effect

7) Purchase Inventory on credit

Assets = Increase (due to increase in Inventory)

Liabilities = Increase (due to increase in Accounts Payable)

Shareholder's Equity = No Effect

8) Paid Salaries to Employees

Assets = Decrease (due to decrease in cash)

Shareholder's Equity = Decrease (due to increase in salaries expense)

Liabilities = No Effect

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