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Transaction Analysis and the Basic Accounting Equation

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

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.

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