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    Transaction Analysis and the Basic Accounting Equation

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    For the following transactions, indicate how each immediately affects the basic accounting equation and what other effects there will be in the future as a result of the transaction:
    d) pay rent in advance for a warehouse
    g) sign warrenty agreements with customers that cover products that were sold to them
    h) buy a patent for a new production process

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    Solution Preview

    Equation is
    Assets = Liabilities + Owner's Equity

    d) Pay rent in advance
    Assets side
    Increase in pre-paid expenses towards rent
    Decrease in cash
    Liability side
    No change

    Implications for future: at the end of the advance period the pre-paid rent will be recognized as expenses
    Asset side
    Decrease pre-paid expenses on asset side
    Liability Side
    Decrease owner's equity (expense decrease the owner's equity and revenues increase ...

    Solution Summary

    This problem shows how the basic accounting equation will be impacted if the firm makes advance payment for the rent or sign warranty agreements or buy patents. The solution takes all possible ways of completing these transactions such as purchasing for cash or purchasing for credit.