Question

4 Explain briefly how each of the following transactions would affect a company’s balance sheet. Remember, assets must equal liabilities plus owners’ equity before and after the transaction.

a) Sale of used equipment with a book value of $300,000 for $500,000 cash.

b) Purchase of a new $80 million building, financed 40 percent with cash and 60 percent with a bank loan.

c) Purchase of a new building for $60 million cash.

d) A $40,000 payment to trade creditors.

e) A firm’s repurchase of 10,000 shares of its own stock at a price of $24 per share.

f) Sale of merchandise for $80,000 in cash.

g) Sale of merchandise for $120,000 on credit.

h) Dividend payment to shareholders of $50,000

Answer 1

Explaining the following transactions and there effect in the balance sheet through an Extract of the balance sheet.

a).  Sale of used equipment with a book value of $300,000 for $500,000 cash

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Plant & equipment	-300,000
Cash	+500,000	Retained Earnings- Profit	+200,000
Total	+200,000	Totall	+200,000

As, Cost of Plant & equipment of $ 300,000 sold for $ 500,000 in cash, will have a profit of $ 200,000

Profit will increase Retained earnings, Plant & equipment will be decreased by $ 300,000 and cash will be increased by $ 500,000

b). Purchase of a new $80 million building, financed 40 percent with cash and 60 percent with a bank loan.

Building will be increased by $80 million, as financed 60% with loan $ 48 million ($80 millon*40%) will increase Loan liability.

Cash will be reduced by $ 32 million as cash is paid 40%

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Building	+80 million
Cash	-32 million	LOan Liability	+48 million
Total	+48 million	Totall	+48 million

c).  Purchase of a new building for $60 million cash.

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Building	+60 million
Cash	-60 million
Total	0	Totall	0

Building is purchased through cash thus net effect will be zero.

d). A $40,000 payment to trade creditors

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Cash	-40,000	Trade Creditors	-40,00
Total	0	Totall	0

As, payment to trade creditors will decrease cash and also decrease trade creditors balance.

e).  A firm’s repurchase of 10,000 shares of its own stock at a price of $24 per share

Repurchase value = 10000 shares * $ 24 shares = $ 240,000

Repurchase share will decrease Shareholders Equity and at the same time Bank or cash will also be decreased

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Bank	-240,000	Shareholders equity	-240,000
Total	0	Totall	0

f). Sale of merchandise for $80,000 in cash

Sale in Cash will increase cash. Merchandise sale will decrease inventory from balance sheet.

Note- Not taking effect of profit as nothing is specifically mentioned

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Inventory	-80,000
Cash	+80,000
Total	0	Totall	0

g).  Sale of merchandise for $120,000 on credit

Sale in Credit will increase Accounts Receivables. Merchandise sale will decrease inventory from balance sheet.

Note- Not taking effect of profit as nothing is specifically mentioned

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Inventory	-120,000
Accounts Receiavables	+120,000
Total	0	Totall	0

h). Dividend payment to shareholders of $50,000

Dividend payment is made through bank, thus bank will decrease.

Further, dividend Payment are adjusted from Retained earnings and will decrease it as it Profits are accumulated in reatined earnings

Extract of Balance Sheet
Asset	Amount	Liabilities & equities	Amount
Bank	-50,000	Retained earnings	-50,000
Total	0	Totall	0

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