Question

Determine the dollar effect on the accounting equation (increase or decrease assets, liabilities, or stockholders' equity) from the following separate transactions.

a. Dillon contributes 4,000 of cash to his corporation in exchange for common stock.
b. Cowboy Corporation purchases equipment with a 10-year note payable for 1,600 and 400 cash.
c. Queen Bee pays off 1,300 of accounts payable.

Answer 1

When Dillon contributes cash to his corporation, assets and stockholders' equity increase. When Cowboy Corporation purchases equipment, assets and liabilities increase. When Queen Bee pays off accounts payable, liabilities and assets decrease.

Step-by-step explanation:

a. When Dillon contributes $4,000 of cash to his corporation in exchange for common stock, the accounting equation will increase assets and stockholders' equity. The cash received will increase the assets, and the common stock issued will increase the stockholders' equity.

b. When Cowboy Corporation purchases equipment with a 10-year note payable for $1,600 and $400 cash, the accounting equation will increase assets and liabilities. The equipment purchased will increase the assets, and the note payable will increase the liabilities.

c. When Queen Bee pays off $1,300 of accounts payable, the accounting equation will decrease liabilities and decrease assets. The accounts payable payment will decrease the liabilities, but the cash used to make the payment will decrease the assets.