Final answer:
Paying $300 cash on account for office supplies does not change equity; assets and liabilities decrease by the same amount. For Acme Bank, when the Fed purchases bonds and the proceeds are converted to new loans, assets shift from bonds to reserves and loans, with liabilities unchanged.
Step-by-step explanation:
When Smart Touch Learning pays $300 cash on account for a previous purchase of office supplies, this transaction would lead to D. None of the above. Specifically, this payment reduces the company’s cash balance, which is an asset, while at the same time reducing accounts payable, which is a liability. As a result, equity remains unchanged because the reduction in assets is offset by an equivalent reduction in liabilities.
Analysis of Balance Sheet Changes for Acme Bank
When the Federal Reserve (the Fed) conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank, the balance sheet of Acme Bank will experience the following changes:
- The assets side will show a decrease in bonds by $10 million, as the bonds are sold to the Fed.
- Simultaneously, reserves will increase by $10 million as the bank receives the sale proceeds in the form of reserves.
- If Acme Bank then converts these bond sale proceeds into new loans, the assets side of the balance sheet would show an increase in loans by the amount of the proceeds.
This transaction results in an increase in both reserves and loans for Acme Bank, with a corresponding decrease in bonds held, while the liability side, including deposits and equity, initially remains unchanged.