Final answer:
The correct record for the transaction on May 1 is an increase to Equipment and an increase to Accounts Payable for $37500 on the company's balance sheet since the purchase is made on credit and no immediate cash payment is involved.
Step-by-step explanation:
On May 1, equipment costing $37500 is purchased on account to be paid in 30 days. The correct way for the company to record the payment of the equipment cost is option D. Increase to Equipment and to Accounts Payable for $37500. Initially, when the equipment is purchased on credit, the company's assets increase because it now owns the equipment. Correspondingly, its liabilities increase because this transaction introduces a new payable (the obligation to pay the supplier in the future).
On May 1, the entry on the company's balance sheet would be:
- Equipment (an asset) increases by $37500.
- Accounts Payable (a liability) increases by $37500 as well.
There is no change to cash at this time because the payment will be made in the future. Therefore, answer B. Decrease to Cash and decrease to Accounts Payable for $37500 and C. Increase to Cash and decrease to Accounts Payable for $37500 are incorrect since they imply a cash transaction has occurred. Answer A. Increase to Equipment and a decrease to Cash for $37500 is also incorrect because the transaction was made on account and not with immediate cash payment.