1.4 Explain briefly how each of the following transactions would affect a compan

Question

1.4 Explain briefly how each of the following transactions would affect a company’s balance sheet. Remember, assets must equal liabilities plus owners’ equity before and after the transaction.

a) Sale of used equipment with a book value of $300,000 for $500,000 cash.

b) Purchase of a new $80 million building, financed 40 percent with cash and 60 percent with a bank loan.

c) Purchase of a new building for $60 million cash.

d) A $40,000 payment to trade creditors.

e) A firm’s repurchase of 10,000 shares of its own stock at a price of $24 per share.

f) Sale of merchandise for $80,000 in cash.

g) Sale of merchandise for $120,000 on credit.

h) Dividend payment to shareholders of $50,000

Explanation / Answer

a)

cash (db) 500,000 ( Increase in assets by $500,000)

Equipment (cr) 300,000 ( Decrease in Assets by $300,000)

Gain on sale of assets (cr) 200,000( Increase in owner equity by $200,000)

b) buiding (db) $80 mn( Increase in assets by $80 mn)

cash (cr) $32 mn (Decrease in assets by $32 mn)

loan payable (cr) $48mn( Increase in Liability by $48mn)

c) building-2 (db) $60mn (Increase in assets by $60 mn)

Cash (cr) $60 mn (Decrease in assets by $60 mn)

d) Trade creditors(db) 40,000 ( decrease in liabilities by $40,000)

cash (cr) 40,000 (decrease in cash by $40,000)

e) Treasury stock(db) 240,000 (decrease in owner equity by $240,000)

cash (cr) 240,000 (decrease in assets by $240,000)

f) cash(db) 80,000 (increase in assets by $80,000)

revenue(cr) 80,000 (increase in owner equity by $80,000)

g) account receivable( db) 120,000 (increase in assets by $120,000)

revenue(cr) 120,000 (increase in owner equity by $120,000)

h)Retained earnings(db) 50,000 (decrease in owner equity by $50,000)

cash(cr) 50,000   (decrease in assets by $50,000)

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