The Gulp convenience store chain buys new soda machines for $450,000 and pays $50,000 for installation costs.One-half of the total cost or $250,000 is paid in cash; a note in the amount of $250,000 is signed.How should the company record this transaction?
A) Debit Cash for $250,000, debit Notes Payable for $250,000, and credit Equipment for $500,000
B) Debit Equipment for $500,000, credit Cash for $250,000, and credit Notes Payable for $250,000
C) Debit cash for $250,000, debit Notes Payable for $250,000, credit Equipment for $450,000, and credit Operating Expenses for $50,000
D) Debit Equipment for $450,000, debit Operating Expenses for $50,000, credit cash for $250,000, and credit Notes Payable for $250,000

Question

Quizplus · Accepted Answer

The purchase of the soda machines and installation costs should be recorded using the cost principle, which requires that assets be recorded at their cost. The total cost of $500,000 should be debited to the Equipment account, as this is the account that records the cost of assets. The payment of $250,000 in cash reduces the cash account with a credit, and the note payable for $250,000 increases the Notes Payable account with a credit. Therefore, the entry should be to debit Equipment for $500,000, credit Cash for $250,000, and credit Notes Payable for $250,000. Option A is incorrect because it records the cost of the equipment twice. Option C is incorrect because it records the installation costs as an operating expense, which is not correct. Option D is incorrect because it records the installation costs as a debit to operating expenses, which is not correct.

The Gulp Convenience Store Chain Buys New Soda Machines for $450,000