I have worked and worked on this problem and came up with 2 different answers for b. and now am unsure of my answer for a.
Problem 2:
For each journal entry, prepare an explanation of the business event that is being
represented:
a. Loan payable $57,000
Cash $11,400 Inventory $45,600
b. Accounts payable $13,450
Cash $13,450
a. The company borrowed $57,000 from a bank. $45,600 of this was used to purchase inventory. An increase in cash Assets and an increase in Liabilities is the result.
b. The company purchased $13,450 worth of inventory on credit (will pay later). The inventory is resold at a later date. This causes an increase in Assets and in Liabilities.
b. Paid $13,450 for items previously purchased on account. This causes a decrease in Assets and in Liabilities and no change to Equity. (From Chapter 3, p. 94)
To verify your answers for parts a and b of the problem, let's look at the journal entries and analyze the transactions:
a. Loan payable $57,000
Cash $11,400
Inventory $45,600
In this transaction, the company borrowed $57,000 from a bank, resulting in an increase in the loan payable account because the company now owes this amount to the bank. The cash account also increased by $11,400 because the company received this cash from the loan. Additionally, the inventory account increased by $45,600 because the company used a portion of the loan to purchase inventory.
So, the correct explanation for a is: The company borrowed $57,000 from a bank. $11,400 of this was received in cash, and $45,600 was used to purchase inventory. This transaction resulted in an increase in cash, inventory, and loan payable.
b. Accounts payable $13,450
Cash $13,450
For this transaction, the company purchased $13,450 worth of inventory on credit. This means that the company obtained the inventory immediately but will pay for it at a later date. As a result of this purchase, the accounts payable account increased by $13,450 because the company now owes this amount to the supplier. The cash account also decreased by $13,450 because no cash was paid at the time of the purchase.
Therefore, the correct explanation for b is: The company purchased $13,450 worth of inventory on credit. This means that the company obtained the inventory immediately but will pay for it at a later date. As a result of this transaction, there was an increase in accounts payable and a decrease in cash.
It seems like you have the correct explanation for part a, but there seems to be a duplicate explanation for part b. The correct explanation for part b is the one you provided initially: The company purchased $13,450 worth of inventory on credit. This caused an increase in accounts payable and a decrease in cash. However, the payment made for items previously purchased on account does not relate to part b, so it should not be included.