A company borrowed $500,000 cash from a bank and used it to purchase $500,000 of new manufacturing equipment. Which of the following items would be increased by the bank loan and equipment purchase transactions? (check all that apply) A. Total Assets B. Inventory C. Cash from Financing D. Cash from Investing E. Notes Payable

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Business

Justice Kirk

19 December, 18:34

A company borrowed $500,000 cash from a bank and used it to purchase $500,000 of new manufacturing equipment. Which of the following items would be increased by the bank loan and equipment purchase transactions? (check all that apply) A. Total Assets B. Inventory C. Cash from Financing D. Cash from Investing E. Notes Payable

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Strong · Answer 1

Lets see what are the double entries of borrowings and purchase of new manufacturing equipment and their implications:

Double Entry for borrowings:

Dr Bank $500,000

Cr Notes Payable $500,000

The above double entry shows that the total assets and Notes Payable are increased due to this transaction. Furthermore, in the Statement of Cash flow we see an increase in Cash from Financing activities and decrease in the Cash from investing activities.

The second transaction is purchase of new manufacturing equipment. It must be accounted for as under:

Dr Manufacturing Equipment $500,000

Cr Bank $500,000

This transaction shows that net impact on the total assets is same as one asset has been increased by spending the other asset. This transaction also has no impact on Cash for financing, inventories and notes payable balances. However, their is increased negative balance in cash from investing activities.