Analyze the effect of each transaction on the expanded accounting equation.?

Mr.X formed ABC corporation on March 31 of the current year.

During the year, the following transcations occurred:

1) Mr.X contributed his life's savings of $60,000 to the company in exchange for all of the stock

2) On March 31, the company borrowed $40,000. The loan was repayable on March 31 of the following year with interest at 10%

3) The company bought inventory for $500,000 on credit

4) The company sold inventory on credit for $600,000. It had paid $400,000 for the inventory sold.

5) The company collected $450,000 on its accounts receivable.

6) The company paid $400,000 on its accounts payable.

7) The company paid miscellaneous operating expenses of $100,000 as they accrued.

8) The company paid its shareholder(Mr.X) a dividend of $10,000

9) The company recognized an appropriate amount of interest expense.

10) The company recognized an appropriate amount of tax expense. The tax rate is 40%.

Analyse the effect of each transaction in accounting equation and

Prepare income and balance sheet as of the end of the period.

1 Answer

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  • JKRB
    Lv 7
    10 years ago
    Favorite Answer

    1) Mr.X contributed his life's savings of $60,000 to the company in exchange for all of the stock

    Assets increase 60,000; Stockholders' Equity increases 60,000

    2) On March 31, the company borrowed $40,000. The loan was repayable on March 31 of the following year with interest at 10%

    Assets Increase 40,000; Liabilities Increase 40,000

    3) The company bought inventory for $500,000 on credit

    Assets increase 500,000; Liabilities increase 500,000

    4) The company sold inventory on credit for $600,000. It had paid $400,000 for the inventory sold.

    Assets increase 200,000; Stockholders' Equity increase 200,000

    5) The company collected $450,000 on its accounts receivable.

    Assets increase 450,000; Assets decrease 450,000

    6) The company paid $400,000 on its accounts payable.

    Assets decrease 400,000; Liabilities decrease 400,000

    7) The company paid miscellaneous operating expenses of $100,000 as they accrued.

    Assets decrease 100,000; Stockholders' Equity decrease 100,000

    8) The company paid its shareholder(Mr.X) a dividend of $10,000

    Assets decrease 10,000; Stockholders' Equity decrease 10,000

    9) The company recognized an appropriate amount of interest expense.

    Liabilities increase 3,000; Stockholders' Equity decrease 3,000

    10) The company recognized an appropriate amount of tax expense. The tax rate is 40%.

    Liabilities increase 38,800; Stockholders' Equity decrease 38,800

    Income Statement

    Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$600,000

    Expenses

    Cost of Goods Sold . . . . . . . . . . . . . $400,000

    Miscellaneous Expense . . . . . . . . . . .100,000

    Interest Expense . . . . . . . . . . . . . . . . . .3,000

    Income Tax Expense . . . . . . . . . . . . . .38,800

    Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 541,800

    Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $. 58,200

    Balance Sheet

    Current Assets

    Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $..40,000

    Accounts Receivable . . . . . . . . . . . . . . . . .150,000

    Inventory . . . . . . . . . . . . . . . . . . . . . . . . . .100,000

    Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $290,000

    Current Liabilities

    Accounts Payable . . . . . . . . . . . . . . . . . . $100,000

    Interest Payable . . . . . . . . . . . . . . . . . . . . . . 3,000

    Income Tax Payable . . . . . . . . . . . . . . . . . . 38,800

    Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . .$141,800

    Notes Payable . . . . . . . . . . . . . . . . . . . . . . 40,000

    Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181.800

    Stockholders' Equity

    Common Stock . . . . . . . . . . . . . . . . . . . . . .60,000

    Retained Earnings . . . . . . . . . . . . . . . . . . . .48,200

    Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . .108,200

    Liabilities and Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . .$290,000

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