Question

Wanting to raise more capital for the business, Dave's Designs decided to allow 2 new equity investors into the business. Each new investor paid $20,000. How will their investment impact the accounting equation?

Answer 1

The investment of $40,000 by the two new equity investors will increase the company's equity and assets by the same amount, while no immediate liabilities are incurred. This cash infusion will potentially boost the company's growth and operations, leading to possible dividends or capital gains as a return for the investors.

Step-by-step explanation:

When Dave's Designs accepts a $20,000 investment from each of the two new equity investors, the accounting equation will be impacted in the following way. The accounting equation is Assets = Liabilities + Equity. By introducing new equity investors, the company's equity increases by the total amount of investment, which is $40,000 (2 investors $ 20,000 each). This increase in equity will also increase the total assets of the company by the same amount, assuming there are no immediate liabilities associated with the investment.

The new investment can be used by the company for various purposes such as expanding operations, purchasing new equipment, or increasing working capital. This infusion of capital can ultimately lead to a higher rate of return for all shareholders if the business grows successfully. Moreover, the investors may expect a rate of return, which can come from dividends or from capital gains achieved by selling the shares at a higher price than they were bought.