Question

During the month, a company enters into the following transactions:

• Borrows $5,250 of cash from the bank by signing a formal agreement to repay the loan in 2 years.
• Buys $5,500 of new equipment on account.
• Pays off $3,500 of accounts payable.
• Pays off $1,750 of notes payable.

Required:

1. Show the effect of these transactions on the basic accounting equation.

2. Prepare the journal entries that would be used to record the transactions.

Required A Required B Show the effect of these transactions on the basic accounting equation. (Enter any decreases to account balances with a minus sign.) Transaction Analysis Liabilities Assets Stockholders' Equity < Required A Required B >

Answer 1

Answer (a)
	Assets			=	Liabilities			+	Common Stock
Transaction	Cash	+	Equipment	=	Note Payable	+	Accounts Payable	+	Common Stock
Borrows $5,250 of cash from the bank by signing a formal agreement to repay the loan in 2 years	$5,250	+	0	=	$5,250	+	0	+	0
Borrows $5,250 of cash from the bank by signing a formal agreement to repay the loan in 2 years	($5,250)	+	0	=	($5,250)	+	0	+	0
Buys $5,500 of new equipment on account.	0	+	$        5,500	=	$5,500	+	0	+	0
Pays off $3,500 of accounts payable.	($3,500)	+	0	=	$0	+	($3,500)	+	0
Pays off $1,750 of notes payable.	($1,750)	+	0	=	($1,750)	+	0	+	0
Amount in bracket indicates as decreased or reduced

Answer B)

Transaction	General Journal	Debit	Credit
Borrows $5,250 of cash from the bank by signing a formal agreement to repay the loan in 2 years	Cash A/c    Dr	5,250
	To Note Payable		5,250
Repayment of bank borrow after 2 year	Note Payable A/c    Dr	5,250
	To Cash		5,250
Buys $5,500 of new equipment on account.	Equipment A/c    Dr	5,500
	To Note Payable		5,500
Pays off $3,500 of accounts payable.	Accounts Payable A/c    Dr	3,500
	To Cash		3,500
Pays off $1,750 of notes payable.	Note Payable A/c    Dr	1,750
	To Cash		1,750