The Candle Shop experienced the following events during its first year of operations, 2016:

(1) Acquired cash by issuing common stock.

(2) Paid a cash dividend to the stockholders.

(3) Paid cash for operating expenses.

(4) Borrowed cash from a bank.

(5) Provided services and collected cash.

(6) Purchased land with cash.

(7) Determined that the market value of the land is higher than the historical cost.

Indicate whether each event is an asset sources, use, or exchange transaction.

Question

Zack Archer

Business

16 May, 05:21

The Candle Shop experienced the following events during its first year of operations, 2016:

(1) Acquired cash by issuing common stock.

(2) Paid a cash dividend to the stockholders.

(3) Paid cash for operating expenses.

(4) Borrowed cash from a bank.

(5) Provided services and collected cash.

(6) Purchased land with cash.

(7) Determined that the market value of the land is higher than the historical cost.

Indicate whether each event is an asset sources, use, or exchange transaction.

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Answers (1)

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Weston Jennings · Answer 1

(1) Acquired cash by issuing common stock. - Asset sources

(2) Paid a cash dividend to the stockholders. - Asset use

(3) Paid cash for operating expenses. - Asset use

(4) Borrowed cash from a bank. - Asset sources

(5) Provided services and collected cash. - Asset source

(6) Purchased land with cash. - Exchange transaction

(7) Determined that the market value of the land is higher than the historical cost. - Neither of all

Explanation:

1) The issue of stocks by the Shop for cash means there would be an increase in cash as well as equity

2) Payment of dividend requires an outflow of cash and as such asset is being used

3) Payment of cash for operating expenses also requires an outflow of cash and therefore an asset use

4) Borrowing cash from the bank is a liability that increases the cash (asset base of the shop) and therefore an asset source

5) Provision of services leads to revenue that leads to cash inflow and therefore an asset source

6) Purchase of land with cash involves an outflow of cash but increase in land and hence an exchange of cash for land in the asset base of the shop

7) Determining that the market value of land is higher that the historical cost does not directly reflect an accounting transaction as according to US GAAP all fixed assets are accounted for using the historical cost model which stipulates that non-current assets are initially recognized at cost and are subsequently carried at cost less accumulated depreciation and cumulative impairment losses.

Any upward adjustments due to changing circumstances are prohibited.