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)
a. The journal entry represents a business event where the company obtained a loan of $57,000. As a result, the company received cash amounting to $11,400 and also purchased inventory worth $45,600.
To explain this event, the company borrowing $57,000 indicates an increase in liabilities because it has a loan payable to the bank. Simultaneously, it received cash worth $11,400, representing an increase in the company's cash assets. Additionally, the company used $45,600 of the loan to purchase inventory, which is an increase in its inventory assets.
b. In this journal entry, the company incurred an expense of $13,450 on credit. This means that the company purchased inventory worth $13,450 but did not make an immediate payment. As a result, the company's accounts payable increased by $13,450, indicating an increase in liabilities.
To explain this event, the company acquiring inventory on credit represents an increase in the company's inventory assets as well as an increase in accounts payable. Although the company did not pay cash immediately, it still acquired inventory that can be sold at a later date.
c. In this journal entry, the company made a payment of $13,450 for items that were previously purchased on account. This means that the company settled the outstanding amount owed for goods that were purchased on credit.
To explain this event, the company's cash decreased by $13,450 due to the payment made. Simultaneously, the accounts payable also decreased by the same amount, indicating a decrease in liabilities. This transaction does not have any impact on equity.
To identify the explanations of business events represented by journal entries, it is important to analyze the changes in accounts involved in the transaction. In this case, we look at how each account is affected (whether it increases or decreases) and understand the underlying business event that caused such changes.
a. The business event represented in this journal entry is the acquisition of a loan payable amounting to $57,000. This means that the company borrowed $57,000 from a bank. As a result of this transaction, the company receives $11,400 in cash, which is an increase in the company's assets. Additionally, the company uses $45,600 of the loan to purchase inventory, which is another increase in assets. However, this transaction also increases the company's liabilities in the form of the loan payable.
b. The business event represented in this journal entry is the purchase of inventory on credit. The company incurred accounts payable of $13,450, which means they bought inventory on credit with the intention to pay later. Simultaneously, the company paid $13,450 in cash. This transaction increases the company's assets by the amount of inventory purchased and also increases their liabilities in the form of accounts payable.
c. The business event represented in this journal entry is the payment of accounts payable. The company paid $13,450 in cash to settle their outstanding balance owed to a creditor. As a result of this transaction, the company's assets decrease by $13,450, and their liabilities also decrease by the same amount. There is no change in the company's equity as a result of this transaction.