Question

Evaluate each of the following transactions in terms of their effect on assets, liabilities, and equity. 1. Buy $15,000 worth of manufacturing supplies on credit 2. Purchase equipment for $48,000 in cash 3. Receive payment of $13,000 owed by a customer 4. Issue $70,000 in stock 5. Borrow $65,000 from a bank 6. Pay $5,000 owed to a supplier 7. Purchase equipment for $42,000 in cash What is the net change in Total Liabilities

Answer 1

1. An evaluation of the following transactions' effect on assets, liabilities, and equity is as follows:

                         Assets      =       Liabilities       +      Equity

1.               +$15,000           +$15,000         +      $0
2.                $0
3.                $0
4.              +$70,000           +$0                  +       $70,000
5.              +$65,000           +$65,000
6.               -$5,000                -$5,000
7.               $0
8. Total      $145,000    =       $75,000       +       $70,000

2. The net change in total liabilities is $75,000 (a reduction of $5,000).

Transaction Analysis:

1. Raw Materials Inventory $15,000 Accounts Payable $15,000
2. Equipment $48,000 Cash $48,000
3. Cash $13,000 Accounts Receivable $13,000
4. Cash $70,000 Common stock $70,000
5. Cash $65,000 Bank Payable $65,000
6. Accounts Payable $5,000 Cash $5,000
7. Equipment $42,000 Cash $42,000

Total Liabilities:

Accounts Payable $15,000

Bank Payable $65,000

Accounts Payable ($5,000)

Net change =  $75,000

Thus, the evaluation shows that with each transaction, the assets are always equal to liabilities and equity.

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Answer 2

The Net change in Total Liabilities is $75,000.

Net change in Total Liabilities

1. Buy $15,000 worth of manufacturing supplies on credit

• Assets increase by $15,000
• Liabilities increase by $15,000
• No effect on equity

2. Purchase equipment for $48,000 in cash

• No effect on asset
• No effect on liability
• No effect on equity  

3. Receive payment of $13,000 owed by a customer

• No effect on asset
• No effect on liability
• No effect on equity

4. Issue $70,000 in stock

• Assets increase by $70,000
• No effect on liability
• Equity increases by $70,000

5.  Borrow $65,000 from a bank

• Assets increase by $65,000
• Liabilities increase by $65,000
• No effect on equity  

6. Pay $5,000 owed to a supplier

• Assets decrease by $5,000
• Liabilities decrease by $5,000
• No effect on equity

6. Purchase equipment for $42,000 in cash

• No effect on asset
• No effect on liability
• No effect on equity  

Net change in Liabilities:

Net change in liabilities =$15,000 +$65,000 -$5,000

Net change in liabilities= $75,000

Therefore the Net change in Total Liabilities is $75,000.

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