E2-5 Determining Financial Statement Effects of Several Transactions LO2-3

FootCovers, Inc., with headquarters in Beaverton, Oregon, is one of the world’s leading manufacturers of athletic shoes and sports apparel. The following activities occurred during a recent year. The amounts are rounded to millions.

Purchased additional buildings for $184 and equipment for $270; paid $402 in cash and signed a long-term note for the rest.
Issued 100 shares of $2 par value common stock for $355 cash.
Declared $145 in dividends to be paid in the following year.
Purchased additional short-term investments for $7,716 cash.
Several FootCovers investors sold their own stock to other investors on the stock exchange for $88.
Sold $4,213 in short-term investments for $4,213 in cash.
Required:

For each of the events (a) through (f), perform transaction analysis and indicate the account, amount, and direction of the effect (+ for increase and - for decrease) on the accounting equation. Check that the accounting equation remains in balance after each transaction. (If no impact on the accounting equation leave cells blank. Enter your answers in millions.)

Event    Asset($ million   =  Liabilities ($ million)   +   Equity($ million)

A           + 52                                +52                                          -

B           +355                              -                                              +355      

C.           -                                    +145                                        -145

D.           -                                    -                                               -

E.            -                                   -                                                -

F.           -                                    -                                                 -

Explanation:

Transaction A involves four accounts:

Three assets account and one liability account.

In these three asset account, there was an increase in two (building and equipment) and decrease in the other (cash).

The net increase in asset equals = $52M  ($184M  +$270M -$402M)

This net increase in asset  always equals increase in liability(Note payable of $52M).

Transaction B involves three account:

Cash, common stock and stock premium.

Increase in Asset (cash) of $355M =    Increase in equity $355M (common stock $200M (100M x $2) + Stock premium (100M x $1.55) $155)

Transaction C involves transfer of Equity to Liability (Dividend is paid out of equity and since it remains payable, it becomes a liability.

Transaction D involves an increase in asset (short term investments) of $7,716M and a decrease in asset (cash) of $7,716M. The net effect is nil.

Transaction E does not have accounting impact on the entity, because it is a transaction between stockholders and potential stockholders.It has no accounting effect on the entity.

Transaction F involves a decrease in asset (short term investments) of $4,213M and an increase in asset (cash) of $4,213M. The net effect is nil.