Question

is this correct

Simpson Auto Body Repair purchased $18,704 of Machinery. The company paid $3,784 in cash at the time of the purchase and the remainder was purchased on account to be paid in four monthly installments.

a. How will the purchase affect the accounting equation?

Increase  total assets by a net amount of $ 14940 and increase  liabilities by $.14940

b. How will the payment of the first monthly installment affect the accounting equation (ignore interest)?

Decrease  assets by $ 3730 and decrease  liabilities by $.3730

Answer 1

Cost of machinery purchased = $18,704

Cash paid immediately = $3,784

Amount to be paid later on = Cost of machinery purchased - Cash paid immediately

= $18,704 - $3,784

= $14,920

a)

Net Increase in total assets = Cost of machinery purchased - Cash paid

= $18,704 - $3,784

= $14,920

Increase in liabilities = $14,920

b)

Remaining amount is payable in four monthly installments.

Amount of monthly installment = $14,920/4

= $3,730

When first monthly installment is paid, assets will decrease in the form of cash by $3,730 and liabilities will decrease by $3,730.

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