Imagine you are the accounting manager for a manufacturing company's fixed assets department. The CFO is...

Imagine you are the accounting manager for a manufacturing company's fixed assets department. The CFO is assessing the benefits of acquiring a new John Deere Tractor and Elite Combine and disposing of similar used equipment. The CFO has asked you to do the following: Explain the effect of each transaction on the financial statements. Explain how the substance and asset and/or monetary exchange affects the reporting of the transaction and the financial statements. Be sure to elaborate on your thinking and provide examples.

Expert Solution

Acquiring a new John Deere tractor has two options paid it upfront or makes installment payments. If thetractor is paid upfront then there won’t be an overall impact on the balance sheet because it will increasethe amount for equipment and decrease the cash to balance. Now if the client decides to make installmentpayment then it will increase equipment assets and increase liability accounts.

Option:1 When tractor purchased full in cash:

We assume that the cost of new tractor is $15,000, so if we purchased it fully in cash payment, then:

BALANCE SHEET

ASSETS

Fixed Assets will increase by $15,000

Cash/Bank will decrease by $15,000

Option:2 When tractor purchased in installment:

We assume that the cost of new tractor is $15,000 and we pay only $5,000 in cash and rest will pay in 2 equal installment, then:

BALANCE SHEET

Liabilities	Assets
Loan will increase by $10,000	Fixed Assets will increase by $15,000
	Cash/Bank will decrease by $5,000

ekkarill92 answered 3 months ago

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