Question

The following events occurred for Favata Company: a. Received $10,000 cash from owners and issued stock to them. b. Borrowed $7,000 cash from a bank and signed a note due later this year. c. Bought and received $800 of equipment on account. d. Purchased land for $12,000; paid $1,000 in cash and signed a long-term note for $11,000. e. Purchased $3,000 of equipment, paid $1,000 in cash and charged the rest on account. Required: For each of the events (a) through (e), perform transaction analysis and indicate the account, amount, and direction of the effect (+ for increase and - for decrease) on the accounting equation. Check that the accounting equation remains in balance after each transaction. (Enter all amounts as positive values.)

Answer 1

Performing transaction analysis for each event and its effect on the accounting equation for Favata Company.

Step-by-step explanation:

To perform transaction analysis for each event (a) through (e), we need to consider the accounts affected and the direction of the effect on the accounting equation. Let's analyze each transaction:

1. Event (a): Received $10,000 cash from owners and issued stock to them.
   Accounts affected: Cash (+$10,000), Common Stock (+$10,000)
   Effect on accounting equation: Assets increase (+$10,000), Owner's Equity increase (+$10,000)
2. Event (b): Borrowed $7,000 cash from a bank and signed a note due later this year.
   Accounts affected: Cash (+$7,000), Notes Payable (+$7,000)
   Effect on accounting equation: Assets increase (+$7,000), Liabilities increase (+$7,000)
3. Event (c): Bought and received $800 of equipment on account.
   Accounts affected: Equipment (+$800), Accounts Payable (+$800)
   Effect on accounting equation: Assets increase (+$800), Liabilities increase (+$800)
4. Event (d): Purchased land for $12,000; paid $1,000 in cash and signed a long-term note for $11,000.
   Accounts affected: Land (+$12,000), Cash (-$1,000), Notes Payable (+$11,000)
   Effect on accounting equation: Assets increase (+$12,000), Assets decrease (-$1,000), Liabilities increase (+$11,000)
5. Event (e): Purchased $3,000 of equipment, paid $1,000 in cash and charged the rest on account.
   Accounts affected: Equipment (+$3,000), Cash (-$1,000), Accounts Payable (+$2,000)
   Effect on accounting equation: Assets increase (+$3,000), Assets decrease (-$1,000), Liabilities increase (+$2,000)

Answer 2

(a)

Increase in Cash of $10,000 and Increase in Common Stock account of $10,000

Asset increases by $10,000; Owner's equity increases by $10,000. Accounting equation remains in balance.

(b)

Increase in Cash of $7,000 and Increase in Short-term Note Payable account of $7,000

Asset increases by $7,000; Liability increases by $7,000. Accounting equation remains in balance.

(c)

Increase in Fixed Asset of $800 and Increase in Account Payable account of $800

Asset increases by $800; Liability increases by $800. Accounting equation remains in balance.

(d)

Increase in Fixed Asset of $12,000, Decrease in Cash of $1,000 and Increase in Long-term Note Payable account of $11,000

Asset increases by $11,000; Liability increases by $11,000. Accounting equation remains in balance.

(e)

Increase in Fixed asset of $3,000, Decrease in Cash of $1,000 and Increase in Account Payable account of $2,000

Asset increases by $2,000; Liability increases by $2,000. Accounting equation remains in balance.

Step-by-step explanation:

Explanation is given in Answer part