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Chapter 1: Q27E (page 39)

Indicate the effects of the following business transactions on the accounting equation for Sam’s Snack Foods, a supplier of snack foods. Transaction (a) is answered as a guide. a. Sam’s Snack Foods received cash from issuance of common stock to stockholders. Answer: Increase asset (Cash); Increase equity (Common Stock) b. Cash purchase of land for a building site. c. Paid cash on accounts payable. d. Purchased equipment; signed a note payable. e. Performed service for a customer on account. f. Employees worked for the week but will be paid next Tuesday. g. Received cash from a customer on accounts receivable. h. Borrowed money from the bank. i. Cash dividends paid to stockholders. j. Incurred utilities expense on account.

Short Answer

Expert verified

(a) Increase asset (Cash); Increase equity (Common Stock)

(b) Increase asset (Land);Decrease asset (Cash)

(c) Decrease asset (Cash); Decrease liability (Accounts Payable)

(d) Increase asset (Equipment); Increase liability (Note Payable)

(e) Increase asset (Accounts Receivable); Increase equity (Service Revenue)

(f) Increase liability (Salaries payable); Decrease equity (Salaries expense)

(g) Increase asset (Cash); Decrease asset (Accounts Receivable)

(h) Increase asset (Cash); Increase liability (Loan)

(i) Decrease asset (Cash), Decrease equity (Dividends)

(j) Increase liability (Utilities payable); Decrease equity (Utilities expense)

Step by step solution

01

Step-by-Step-SolutionStep 1: Explanation on Accounting Equation

As per the accounting equation general rule, the left side of the equation represents the assets, and the right side of the equation represents liabilities and equity.

02

Explanation on Asset, Liability and Equity

Assets are resources that provides future economic benefits and are owned by the business.

Liabilities are the obligations (loan or debts) of the entity.

Equity represents the claim on the assets of the entity by the owners.

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Most popular questions from this chapter

Pretty Pictures works weddings and prom-type parties. The balance of Retained Earnings was \(20,000 at December 31, 2017. At December 31, 2018, the business’s accounting records show these balances: Insurance Expense \) 6,000 Accounts Receivable $ 5,000 Cash 42,000 Notes Payable 10,000 Accounts Payable 13,000 Retained Earnings, Dec. 31, 2018 ? Advertising Expense 4,500 Salaries Expense 30,000 Service Revenue 115,000 Equipment 85,500 Dividends 13,000 Common Stock 28,000 Prepare the following financial statements for Pretty Pictures for the year ended December 31, 2018: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

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Using the accounting equation for transaction analysis and preparing financial statements Allen Shonton recently opened his own accounting firm on April 1, which he operates as a corporation. The name of the new entity is Allen Shonton, CPA. Shonton experienced the following events during the organizing phase of the new business and its first month of operations in 2018: Apr. 5 Shonton deposited \(75,000 in a new business bank account titled Allen Shonton, CPA. The business issued common stock to Shonton. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(9,500. 10 Consulted with tax client and received \)4,000 for services rendered. 11 Paid utilities, \(190. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)20,000. 18 Paid office rent, \(750. 25 Received amount due from client that was billed on April 12. 27 Paid full amount of accounts payable created on April 7. 30 Cash dividends of \)3,500 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Allen Shonton, CPA. Use a format similar to Exhibit 1-6. 2. Prepare the following financial statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

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