Question

Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade. (The exchange has commercial substance.)
Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.
Instructions
Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

Answer 1

When the Federal Reserve conducts an open market purchase, it affects the balance sheet of the bank involved. The bank's reserve assets increase, while its bond assets decrease. The bank then converts the bond sale proceeds into new loans, resulting in an increase in its loan assets.

Step-by-step explanation:

Open market purchases by the Federal Reserve result in changes to the balance sheet of the bank involved. In this case, when the Fed buys $10 million in Treasury bonds from Acme Bank, Acme's reserve assets will increase by $10 million and its bond assets will decrease by $10 million. Acme will then convert the bond sale proceeds into new loans, resulting in an increase in its loan assets.

The initial balance sheet of Acme Bank contains assets of reserves ($30 million), bonds ($50 million), and loans ($50 million), and liabilities of deposits ($300 million) and equity ($30 million). After the Fed's purchase and the conversion of bond sale proceeds to new loans, the new balance sheet will show an increase in reserves, a decrease in bonds, and an increase in loans.

Answer 2

Here are the general journal entries required to record the acquisition and payment in each of the independent cases:

The General Journal Entries

Case 1: Payment Made Within the Discount Period

Date Account Title Debit Credit

Date of Purchase Equipment 10,000

Accounts Payable 10,000

Date of Payment Accounts Payable 9,800

Discount on Accounts Payable 200

Case 2: Trade-In of Old Equipment

Date Account Title Debit Credit

Date of Trade Equipment 10,000

Accumulated Depreciation-Equipment 6,000

Equipment-Trade-In 2,000

Cash 9,500

Case 3: Zero-Interest-Bearing Note

Date Account Title Debit Credit

Date of Purchase Equipment 10,800

Notes Payable 10,800

Date of Payment Notes Payable 10,800

Interest Expense 972

Discount on Notes Payable 972