Question

(Financial Statement Impact of Liability Transactions) Presented below is a list of possible transactions.

1. Purchased inventory for \(80,000 on account (assume perpetual system is used).

2. Issued an \)80,000 note payable in payment on account (see item 1 above).

3. Recorded accrued interest on the note from item 2 above.

4. Borrowed \(100,000 from the bank by signing a 6-month, \)112,000, zero-interest-bearing note.

5. Recognized 4 months’ interest expense on the note from item 4 above.

6. Recorded cash sales of \(75,260, which includes 6% sales tax.

7. Recorded wage expense of \)35,000. The cash paid was $25,000; the difference was due to various amounts withheld.

8. Recorded employer’s payroll taxes.

9. Accrued accumulated vacation pay.

10. Recorded an asset retirement obligation.

11. Recorded bonuses due to employees.

12. Recorded a contingent loss on a lawsuit that the company will probably lose.

13. Accrued warranty expense.

14. Paid warranty costs that were accrued in item 13 above.

15. Recorded sales of product and related service-type warranties.

16. Paid warranty costs under contracts from item 15 above.

17. Recognized warranty revenue (see item 15 above).

18. Recorded estimated liability for premium claims outstanding. InstructionsSet up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated.

#	Assets	Liabilities	Owners’ Equity	Net income
1

Use the following code:I: Increase D: Decrease NE: No net effect

Short answer

Purchased inventory on accounts increases the business's inventory and increases the liability.

Step-by-step solution

Meaning of Financial Statement

The financial statements are the statements or documents prepared to find out about the company's financial position and financial performance. Financial statements are prepared at the end of the reporting period.

Preparation of table to analyze the effect of the transactions in the financial statements

#	Assets	Liabilities	Owners’ Equity	Net income
1. Inventory purchase for $80,000	Increase	Increase	No net effect	No net effect
2. Note payable issued for $80,000 for the item (1)	No net effect	No net effect	No net effect	No net effect
3. Accrued interest for the item (2)	No net effect	Increase	Decrease	decrease
4. Borrowed $100,000 from a bank by signing a 6-month, $112,000, zero interest bearing note	Increase	Increase	No net effect	No net effect
5. Interest expense recognized for 4 months for the item (4)	No net effect	Increase	Decrease	Decrease
6. Cash sales of $75,260, which includes the sales tax of 6%	Increase	Increase	Increase	Increase
7. Wage expense of $35,000. Cash paid - $25,000 and the difference amount was a holdback	Decrease	Increase	Decrease	Decrease
8. Payroll taxes of employer	No net effect	Increase	Decrease	Decrease
9. Accrued accumulation vacation pay	No net effect	Increase	Decrease	Decrease
10. Asset retirement obligation recorded	Increase	Increase	No net effect	No net effect
11. Bonuses due to employees are recorded	No net effect	Increase	Decrease	Decrease
12. Contingent loss on a lawsuit that might be lost by the company	No net effect	Increase	Decrease	decrease
13. Accrued warranty expense is recorded	No net effect	Increase	Decrease	Decrease
14. The amount is paid to the warranty which was accrued in the item (13)	Decrease	Decrease	No net effect	No net effect
15. Sales of products and related service type warrants are recorded	Increase	Increase	Increase	Increase
16. The warranty contract costs are paid for the item (15)	Decrease	No net effect	Decrease	Decrease
17. The warranty revenue is recognized under item (15)	No net effect	Decrease	Increase	Increase
18. Estimated liability for the premiums claims outstanding is recorded	No net effect	Increase	Decrease	Decrease