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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise 2-41 Transaction Analysis and Business Activities

The accountant for Compton Inc. has collected the following information:

  1. Compton purchased a tract of land from Jacobsen Real Estate for $875,000 cash.
  2. Compton issued 2,000 shares of its common stock to George Micros in exchange for $125,000 cash.
  3. Compton purchased a John Deere tractor for $86,000 on credit.
  4. Michael Romano paid Compton $10,400 cash for services performed. The services had been performed by Compton several month ago for a [ma] price of $12,000 of which Rotunno had previously paid $1,600.
  5. Compton paid its monthly payroll by issuing checks totaling $36,250.
  6. Compton declared and paid its annual dividend of $5,000 cash

Required:

1. Prepare an analysis of the effects of these transactions on the accounting equation of the business. Use the format below.

Chapter 2, Problem 41E, Exercise 2-41 Transaction Analysis and Business Activities The accountant for Compton Inc. has

2. Indicate whether the transaction is a financing, investing, or operating activity.

To determine

Accounting Equation:

The accounting equation explains that the assets must be equal to the liabilities and stockholders’ equity on the occurrence of a business transaction. The dual aspect concept of accounting signifies that on each transaction the elements of the accounting equations are affected equally.

Requirement 1

To Prepare:

Prepare an analysis of the effects of these transactions on the accounting equation of the business.

Explanation
    AssetsLiabilitiesStockholders’ Equity
    ACash (Decrease)
    Land (Increase)
    BCash (Increase)Contributed Capital (Increase)
    C
To determine

Introduction:

Operating Activity: The activities which are concerned with day-to-day operation of a business enterprise are called operating activities.

Investing Activity: Investing activities are business transactions which have an intention of making profit for long and short period of time.

Financing Activity: The business activities which are related to procurement of finance for the short-term and long-term requirement are termed financing activities.

Requirement 2

Categorize the transaction in financing, investing or operating activity.

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