Question

Mateo Inc. is a retailer of men's and women's clothing aimed at college-age customers Listed below are additional transactions that Mateo was considering at the end of the accounting period.

Required:
Complete the following tabulation, indicating the sign of the effect of each additional transaction (for increase,- for decrease, and NE for no effect) Consider each item independently and ignore taxes. (Hint: Construct the journal entry for each transaction before evaluating its effect)
a. Borrowed $3,000 on a line of credit with the bank.
b. Incurred salary expense of $1.000 paid for in cash
c. Provided $2,000 of services on account.
d. Purchased $700 of inventory on account
e Sold $500 of goods on account. The related cost of goods sold was $300 Gross profit margin was 45 percent before this sale.

Answer 1

The transactions impact the financial statements as follows: borrowing increases both assets and liabilities; salary expenses decrease both assets and equity; providing services on account increases assets and equity; purchasing inventory on account increases both inventory assets and liabilities, and the sale of goods on account increases receivables and equity due to gross profit.

Step-by-step explanation:

The student has asked about the impact of various business transactions on the financial statements of Mateo Inc. Here is how each transaction would affect the company's balance sheet:

• a. Borrowed $3,000 on a line of credit with the bank: Assets (Cash) +$3,000, Liabilities (Notes Payable) +$3,000. Cash increases as the company borrows money, and liabilities increase due to the new debt.
• b. Incurred salary expense of $1,000 paid for in cash: Assets (Cash) -$1,000, Equity (Retained Earnings) -$1,000. Cash decreases with the payment, and retained earnings decrease due to the expense.
• c. Provided $2,000 of services on account: Assets (Accounts Receivable) +$2,000, Revenues +$2,000 (which increases equity). The company recognizes revenue it expects to collect, increasing assets and equity.
• d. Purchased $700 of inventory on account: Assets (Inventory) +$700, Liabilities (Accounts Payable) +$700. Inventory increases as goods are bought on credit, and liabilities increase due to the owed amount.
• e. Sold $500 of goods on account. The related cost of goods sold was $300. Gross profit margin was 45 percent before this sale: Assets (Accounts Receivable) +$500, Revenues +$500, Assets (Inventory) -$300, Equity (Retained Earnings) +$200 (gross profit from the sale).

The gross profit from the sale is calculated as the selling price minus the cost of goods sold, so $500 - $300 = $200 increase in retained earnings. Service on account and sale of goods on account both increase Accounts Receivable, reflecting future cash inflows.