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Sanyu Sony started a new business and, during December, invested \$10,000 cash and equipment valued at \$5,000 into the business. What is the correct journal entry to record this transaction?
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2. Transaction Analysis
Journal Entries: Business Formation Example
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Larned Corporation was formed by issuing \$10,000 of common stock for cash and borrowing \$5,000 from a bank. Which of the following journal entries correctly records these transactions?
A
Debit Cash \$5,000; Credit Common Stock \$5,000
B
Debit Cash \$15,000; Credit Common Stock \$10,000; Credit Notes Payable \$5,000
C
Debit Common Stock \$10,000; Debit Notes Payable \$5,000; Credit Cash \$15,000
D
Debit Cash \$10,000; Debit Notes Payable \$5,000; Credit Common Stock \$15,000
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Step 1: Understand the transactions involved. Larned Corporation issued \$10,000 of common stock for cash and borrowed \$5,000 from a bank. These transactions affect the company's cash account, common stock account, and notes payable account.
Step 2: Analyze the impact of issuing common stock for cash. When common stock is issued, the company receives cash (an asset) and increases its equity (common stock). The journal entry for this transaction would be: Debit Cash \$10,000 (increase in asset) and Credit Common Stock \$10,000 (increase in equity).
Step 3: Analyze the impact of borrowing \$5,000 from the bank. Borrowing money increases the company's cash (an asset) and creates a liability (notes payable). The journal entry for this transaction would be: Debit Cash \$5,000 (increase in asset) and Credit Notes Payable \$5,000 (increase in liability).
Step 4: Combine the two transactions into a single journal entry. Since both transactions affect the cash account, the total cash received is \$15,000 (\$10,000 from issuing common stock + \$5,000 from borrowing). The combined journal entry would be: Debit Cash \$15,000, Credit Common Stock \$10,000, and Credit Notes Payable \$5,000.
Step 5: Verify the journal entry. Ensure that the total debits equal the total credits to maintain the accounting equation. In this case, Debit Cash \$15,000 equals Credit Common Stock \$10,000 + Credit Notes Payable \$5,000, confirming the journal entry is correct.
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