Question

LO2-3 EXERCISE 2.6 The Accounting Equation A number of business transactions carried out by Smalling Manufacturing Company are as follows a. Borrowed money from a bank. b. Sold land for cash at a price equal to its cost. c. Paid a liability d. Returned for credit some of the office equipment previously purchased on credit but not yet paid for. (Treat this the opposite of a transaction in which you purchased office equipment on credit e. Sold land for cash at a price in excess of cost. (Hint: The difference between cost and sales price represents a gain that will be in the company's income statement f. Purchased a computer on credit. g. The owner invested cash in the business. h. Purchased office equipment for cash. i. Collected an account receivable. Indicate the effects of each of these transactions on the total amounts of the company's assets. liabilities, and owners' equity. Organize your answer in tabular form, using the following column headings and the code letters I for increase, D for decrease, and NE for no effect. The answer for transaction a is provided as an example. Transaction Assets Liabilities + Owners' Equity (a) NE

Answer 1

Transaction	Assets	=	Liabilities	+	Owners' Equity
(a)	I	=	I	+	NE
(b)	NE	=	NE	+	NE
(c)	D	=	D	+	NE
(d)	D	=	D	+	NE
(e)	I	=	NE	+	I
(f)	I	=	I	+	NE
(g)	I	=	NE	+	I
(h)	NE	=	NE	+	NE
(i)	NE	=	NE	+	NE

a) When a business borrowed money from bank, the assets and liabilities of the company will increases.

b) When a business sold land for cash at a price equal to its cost, the cash of a business will increases while the land of the company will decreases with the same amount as the selling price is equal to cost price by which there will no effect on accounting equation.

c) When a business paid liability, the cash and the liabilities of the business will decreases. Hence, the assets and liabilities will decreases.

d) When a business returned for credit some of the office equipment previously purchased on credit but not yet paid, the office equipment and the accounts payable will decrease by which the assets and the liabilities of a business will decreases.

e) When a business sold land for cash at a price in excess of cost, the selling price of the land will be added in the cash, the cost price of the land will be decrease from land and the difference between the sales price and cost price is considered as gain and is added in the retained earnings by which the assets and owners' equity of a business will increase with the net amount of sales price minus cost price.

f) When a business purchased a computer on credit, the computer and the accounts payable will increases by which the assets and the liabilities of a business will increases.

g) When the owner invested cash in the business, the cash and owners' capital will increases by which the assets and owners' capital will increases.

h) When a business purchased office equipment for cash, the office equipment will increases while the cash will decreases. Hence, there will be no effect on accounting equation.

i) When a business collected accounts receivable, the cash will increases while the accounts receivable will decreases. Hence, there will be no effect on accounting equation.