Your firm decides to increase equity by $1,000,000. Which of the following sets of transactions could...

Your firm decides to increase equity by $1,000,000. Which of the following sets of transactions could NOT be appropriate ledger entries?

Increase equity by $1,000,000 and increase long-term assets by $1,000,000

Increase equity by $1,000,000, decrease long-term debt by $500,000, and increase inventory by $500,000

Increase equity by $1,000,000 and increase inventory by $1,000,000

All of these transactions would be appropriate.

Expert Solution

Answer: All of these transactions would be appropriate.

Explanation:

The double entry is correct for all the above transactions as they would satisfy the accounting equation Assets = Liability+Equity.

1) Increase equity by $1,000,000 and increase long-term assets by $1,000,000

Assets [long term assets] increase by 1000000 followed by increase in equity, which keeps the accounting equation balanced.

2) Increase equity by $1,000,000, decrease long-term debt by $500,000, and increase inventory by $500,000

Asset [inventory] increases by $500000; debt decreases by $500000 and equity increases by $1000000. This also balances the accounting equation as it is effectively

500000 [assets] = 1000000 [equity] - 500000 [debt]

3) Increase equity by $1,000,000 and increase inventory by $1,000,000

Assets [inventory] increase by 1000000 followed by increase in equity, which keeps the accounting equation balanced.

jeff jeffy answered 11 months ago

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