Your new firm just purchased a storage building and property for $40,000 that was paid for with a $20,000 long-term loan and a new infusion of $20,000 from the owners.Which of the following accounting entries is most appropriate?
A)$40,000 increase in plant,property and equipment,a $20,000 decrease in long-term debt,and a $20,000 decrease in owners equity.
B)$40,000 increase in plant,property and equipment,a $20,000 increase in long-term debt,and a $20,000 increase in owners equity.
C)$40,000 increase in cash and a $40,000 increase in plant,property,and equipment.
D)$40,000 increase in plant,property and equipment and a $40,000 increase in cash.

Question

Quizplus · Accepted Answer

The purchase of the storage building and property is a capital expenditure, which increases the value of the company's plant, property, and equipment. The loan and the owner's contribution are both sources of financing for the purchase and should be recorded as such. Therefore, the appropriate accounting entry would be to increase plant, property, and equipment by $40,000, increase long-term debt by $20,000, and increase owner's equity by $20,000. Hence, choice B, which represents an increase in plant, property, and equipment, long-term debt, and owner's equity, is the most appropriate option. The other choices either do not account for all aspects of the transaction, or record the increase in cash without accounting for the source of that cash.

Your New Firm Just Purchased a Storage Building and Property