On January 1, Company E has total assets of $500,000 and total liabilities of $2
ID: 2498734 • Letter: O
Question
On January 1, Company E has total assets of $500,000 and total liabilities of $200,000. On January 2, Company E entered into the following three transactions.
a. Sold inventory costing $105,000 to customers for $150,000. The customers paid $100,000 in cash and the remaining $50,000 was put on the customers’ accounts.
b. Paid employee wages totaling $28,000. These wages had not been previously recorded.
c. Borrowed $85,000 cash with a long-term bank loan.
After these three transactions, compute Company E’s TOTAL OWNERS’ EQUITY.
$285,000
$232,000
$317,000
$267,000
$272,000
$285,000
$232,000
$317,000
$267,000
$272,000
Explanation / Answer
Total Assets = Total liabilities + Total Owner's Equity
Or, Total Owner's Equity = $300,000
a. Sale of invetory at profit of $45,000 will add to owner equity
b. Unrecorded payment to employees will reduce profitability by $28,000 and thus owner's equity
c. Borrwed funds will increase cash by $85,000 and total liabilities by $85,000
Hence revised owner's equity = $300,000 + $45,000 - $28,000 = $317,000