Differences Between Two Ways to Acquire Capital Assets

What is the difference between Case A and Case B in acquiring capital assets?

Are the account balances the same or different after making both sets of entries for Case A and Case B?

Answer:

Case A involves the issuance of common shares, leading to an increase in the Common Shares and Cash accounts. On the other hand, Case B includes the purchase of a building and equipment, resulting in changes in the Building, Equipment, and Cash accounts. The account balances after making entries are different for Case A and Case B.

Explanation:

When a company issues common shares in Case A, it is essentially selling ownership in the business to raise capital. This transaction increases the amount of funds available to the company in the Cash account, but it also leads to a corresponding increase in the Common Shares account to accurately reflect the new ownership structure.

Alternatively, in Case B, the company invests in tangible assets like a building and equipment. This purchase results in an increase in the value of capital assets (Building and Equipment accounts) but also leads to a reduction in available cash as reflected in the Cash account.

Comparing the account balances for Case A and Case B, we can see that Case A only impacts the Common Shares and Cash accounts, while Case B involves changes in the Building, Equipment, and Cash accounts. Therefore, the total account balances differ between the two cases due to the nature of the transactions involved.