Question

Question 1. Impact on the Accounting Equation and Journal Entries Following are events related to Dinky Donky Limited (the “Company”) for the current month (that is May). Assume all transactions relate to this month

. Determine the impact on the accounting equation of the following transactions, and write the relevant journal entry for each:

1) The owner of the company placed $250,000 into the company at the start of the month by way of half in cash and the rest in transfer of two vehicles of equal value.

2) The company bought an apartment building from Diamond Limited worth $20,000,000 by issuing $5,000,000 of bond debt, taking out a bank loan of $8,000,000 and remainder by issuing shares.

3) The company received the gas bill at the end of the month amounting to $80,000. The company has 3 months to pay.

4) At the end of this month the wages had yet to be paid. On last day of month, the company paid half of monthly wage in cash and said they would pay the balance in two weeks. Monthly wages are $600,000.

5) The company paid the outstanding electricity bill for last month. The bill was received by the company 14 days ago and recorded then. The value of the bill was $85,000.

6) The company paid $100,000 in cash for administrative supplies required during the month. All supplies will be used in the month.

7) The company recognized that $500,000 of its long-term debt is actually due to be paid in next 3 months.

8) The company sold inventory to a customer. The customer paid $560,000 by paying 75% in cash and the rest by credit. The inventory originally cost the company $320,000.

9) The company purchased inventory valued at $400,000. Half of the inventory was paid in cash, and the remainder was acquired on credit.

10) The company bought a new factory paying $300,000 in cash and transferring a block of land valued at $500,000 to the old owner of the factory.

11) The company paid a dividend of $200,000 at the end of the month to the owner of the company.

12) The owner of the company paid $40,000 for his family to attend the Champion’s League Final (May 31, 2020) between Barcelona and Liverpool that Liverpool won 25 – 0. The owner used his wife’s credit card to make the purchase. Required:

Analyse how each transaction above impacts the accounting equation. Each transaction is to be treated independently. Then, record the journal entries for the transactions noted above.

Answer 1

Particulars	Debit($)	Credit($)
Cash A/c	125,000
Car A/c	125,000
Capital A/c		250,000
(starting business with $250,000 as capital which is done half by cash and half with two vehicles with same value)
Building A/c	20,000,000
Bond A/c		5,000,000
Bank loan A/c		8,000,000
Equity shares		7,000,000
(Building purchased by bond debt, bank loan and issue of equity shares.)
Gas bill A/c	80,000
Outstanding Expenses A/c		80,000
(Gas bill due for the month but not paid yet )
Wages A/c	600,000
Cash A/c		300,000
Outstanding Expenses A/c		300,000
(Half of the wages are paid by cash and half of the wages are due.)
Outstanding Expense A/c	85,000
Cash A/c		85,000
(paid electricity bill of previous month)
Administrative Expenses A/c	100,000
Cash A/c		100,000
(Administrative supplies purchased for cash)
Cash A/c	420,000
Debtors A/c	140,000
Inventory A/c		320,000
Profit & Loss A/c		240,000
(sold inventory by cash and credit)
Inventory A/c	400,000
Cash A/c		200,000
Creditors A/c		200,000
(inventory purchased by cash and credit)
Factory A/c	800,000
Cash A/c		300,000
Land A/c		500,000
(New factory purchased partly by cash and sale of land)
Dividend A/c	200,000
Cash A/c		200,000
(Dividend paid to owner)
Drawings A/c	40,000
Credit Card A/c		40,000
(tickets purchased by credit card)
Credit Card A/c	40,000
Cash A/c		40,000
(payment of credit card)

Particulars	Assets ($)	Liabilities($)
Car	125,000
Capital		250,000
Building	20,000,000
Bond		5,000,000
Bank loan		8,000,000
Equity Shares		7,000,000
Cash	(680,000)
Factory	800,000
Long term debt		500,000
Drawings	40,000
Outstanding expenses		295,000
Inventory	80,000
Debtors	140,000
Creditors		200,000
Profit & Loss A/c		240,000