CanadaHelp with my accountancy exercise, very simple, thanks!

missingmay

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
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

bklynboy

VIP Member
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.

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