Question

For each transaction, determine the impact-increase, decrease, or no effect-on total assets, total liabilities, and total equity. Transcations Issued $15,000 of common stock for cash Issued $26,000 of common stock for land Purchased treasury stock for $4,000 cash Issued $8,000 of preferred stock for cash Total Assets Total Liabilities Total Equity

Answer 1

A Fed open market purchase of Treasury bonds increases the selling bank's reserves while decreasing bonds held. If the bank lends out these new reserves, the loans account rises, leaving total assets unchanged, with shifts in asset composition. Liabilities and equity are not directly affected by this transaction.

Step-by-step explanation:

When the Fed conducts an open market purchase of Treasury bonds from a bank, the bank's balance sheet will reflect changes in various accounts. Here is how an open market purchase of $10 million in Treasury bonds from Acme Bank would affect its balance sheet:

Reserves increase by $10 million because the bank receives this amount in cash from the Fed.

Bonds decrease by $10 million because the bank has sold these bonds to the Fed.

When Acme uses the proceeds to issue new loans, the loans account increases by $10 million, assuming that Acme lends out these funds.

After the transaction, the bank's total assets remain unchanged because the increase in reserves is offset by the decrease in bonds. If the bank issues new loans, there is just a shift in the composition of assets - from bonds to reserves and then to loans. There is no change in total liabilities or equity from this transaction itself.

The balance sheet after the transaction would show the following (simplified for illustration):

• Assets: reserves $40 (initial $30 + $10 from bond sale), bonds $40 (initial $50 - $10 from bond sale), and loans $60 (initial $50 + $10 new loans)
• Liabilities: deposits $100, equity $30