Help with my accountancy exercise, very simple, thanks!

Canada Discussion in 'Exams and Studying' started by missingmay, Jul 20, 2018.

  1. missingmay

    missingmay

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    I am doing a bookkeeping exercise that is in my book. It says: Kenneth Lee operates a computer software business. He has a $16.000 cash balance. New equipment needed to develop the latest type of programs for his clients will cost $20.000. This will require some borrowing in order to pay for it. Lee wants to use $6.000 of cash from his business arranging a bank loan for the balance. What will be in the amount of the loan? what changes will occur in the fundamental bookkeeping equation as a result of the loan?

    So the way I understood the concepts and this particular situation, I said in my answer: Loan amount: $14.000

    Asset Liability Owners equity
    $20.000 $14.000 $6.000
    ___________ _____________________________
    $20.000 $20.000
    However, when I checked the answers, as answer shows:
    Loan for $14.000 ($20.000-$6.000)
    Fundamental equation:
    Assets increase $14.000 Liabilities increase $14.000, OE no change.

    To me it makes no sense because when they purchase the equipment for $20.000 you cannot say the entrance to the company assets are $14.000, also he is putting money from his pocket to buy something for the company, so means he is investing or putting more capital, where it shows that in the answer?

    I hope someone out there can help me to clarify these ideas. Thank you
     
    missingmay, Jul 20, 2018
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  2. missingmay

    bklynboy VIP Member

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    He is using company money to put down payment on equipment. So he buys an asset of 20 less 6 in cash to pay from company funds for a net asset increase of 14. I think you assumed it came out of his pocket which I agree was not clear in the text.
     
    bklynboy, Jul 20, 2018
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