Question

The following events took place in January 2018. Sports Equipment Rentals (SER) rents equipment on an hourly or daily basis to customers. SER prepares monthly financial statements. Match each event with the choice that correctly describes the effect of the transaction on the accounting equation.

Increase / decrease means one asset account increases and another decreases by the same amount.

Use this selection for the next eight questions:

-       A.       B.       C.       D.       E.    January 3: SER purchases $2,000 of sports equipment on credit.       -       A.       B.       C.       D.       E.    January 8: Customers pay SER $8,500 for daily rentals.       -       A.       B.       C.       D.       E.    January 16:  SER receives $4,000 for a 2-week rental for equipment for several teams.  The rental period begins on February 10, 2018.       -       A.       B.       C.       D.       E.    January 17: SER signs an agreement to provide $4,500 of equipment to a customer in early February. The customer has not yet made a payment.       -       A.       B.       C.       D.       E.    January 25: SER receives $3,000 for services provided and billed in the prior month.       -       A.       B.       C.       D.       E.    January 30: SER rents out skates for a party that day and bills the customer for $300.       -       A.       B.       C.       D.       E.    January 30: SER completes a contract by providing rental equipment to a private school from January 17-30. The school paid $500 for the rental in December 2017.       -       A.       B.       C.       D.       E.    January 31: SER receives $120 in cash for monthly interest earned on a note receivable. (SER loaned an employee $10,000 last November and the employee is paying SER monthly interest. The employee will repay the $10,000 principal after one year.)

Answer 1

Accounting Equation: Assets = Equity + Liability

All the business transaction affects the equation based on double accounting concept. Above transaction will affect the equation in following manner.

• Credit purchase of equipment : It will increase Assets by $2,000 and Liability as well by $2,000.
• Daily rental received by SER : It will increase Assets by $8,500 and Equity by $8,500. Daily rental is the income of SER so it will increase profitibility and equity.
• Rent received for Feb month : It will increase Assets by $4,000 and Liability by $4,000. Advance rent will be treated as liability untill the right to received the rent being established.
• It will not affect the equation because merely signing an agreement without any payment for the services will not result in any assets or liability.
• Payment received from Debtor : It will increase Assets by $3,000 and decrease another Assets by $3,000.Therefore, Il will not affect the financial position of SER. It is just a substitution of one form of assets into another.