Question

Performance Plastics Company (PPC) has been operating for three years. The beginning account balances are

Cash $35,000
Accounts Receivable 5,000
Inventory 40,000
Supplies 5,000
Notes Receivable (due in three years) 2,000
Equipment 80,000
Buildings 120,000
Land 30,000
Accounts Payable 37,000
Notes Payable (due in three years) 80,000
Common Stock 150,000
Retained Earnings 50,000

During the year, the company had the following summarized activities:

a. Purchased equipment that cost $21,000; paid $5,000 cash and signed a two-year note for the balance.
b. Issued an additional 2,000 shares of common stock for $20,000 cash.
c. Borrowed $50,000 cash from a local bank, payable June 30, in two years.
d. Purchased supplies for $4,000 cash.
e. Built an addition to the factory buildings for $41,000; paid $12,000 in cash and signed a three-year note for the balance.
f. Hired a new president to start January 1 of next year. The contract was for $95,000 for each full year worked.

Required:
Analyze transactions to determine their effects on the accounting equation.

Answer 1

Performance Plastics Company (PPC)

Analysis of Transactions to determine their effects on the Accounting Equation:

Assets = Liabilities + Equity

a. Assets (Equipment +$21,000 Cash -$5,000) = Liabilities (Notes Payable +$16,000) + Equity

b. Assets (Cash +$20,000) = Liabilities + Equity (Common Stock +$20,000)

c. Assets (Cash +$50,000) = Liabilities (Bank Loan +$50,000) + Equity

d. Assets (Supplies +$4,000 Cash -$4,000) = Liabilities + Equity

e. Assets (Factory Building +41,000 Cash -$12,000) = Liabilities (Notes Payable +$29,000) + Equity

f. N/A

Step-by-step explanation:

a) Data and Calculations:

Cash $35,000

Accounts Receivable 5,000

Inventory 40,000

Supplies 5,000

Notes Receivable

(due in three years) 2,000

Equipment 80,000

Buildings 120,000

Land 30,000

Total assets $317,000

Accounts Payable 37,000

Notes Payable

(due in three years) 80,000

Common Stock 150,000

Retained Earnings 50,000

Total liabilities +

equity $317,000

b)The accounting equation is an important accounting concept that describes the double-entry basis of accounting. It shows that at every given time and after every business transaction, the assets are always equal to the liabilities and the equity balance. This implies that the assets are funded from the contributions of creditors and owners.