Question

Zen began a new consulting firm on January 5. Following is a financial summary, including balances, for each of the company’s first five transactions (using the accounting equation form).

Assets = Liabilities + Equity

Transaction Cash + Accounts + Office + Office = Accounts + Common + Revenues Receivable Supplies Furniture Payable Stock

1. \(40,000 + \) 0 + \( 0 + \) 0 = \( 0 + \)40,000 + \( 0

Identify the explanation from a through j below that best describes each transaction 1 through 5 above and enter it in the blank space in front of each numbered transaction.

a. The company purchased office furniture for \)8,000 cash.

b. The company received \(40,000 cash from a bank loan.

c. The owner invested \)1,000 cash in the business in exchange for its common stock.

d. The owner invested \(40,000 cash in the business in exchange for its common stock.

e. The company purchased office supplies for \)3,000 by paying \(2,000 cash and putting \)1,000 on credit.

f. The company billed a customer \(6,000 for services provided.

g. The company purchased office furniture worth \)8,000 on credit.

h. The company provided services for \(1,000 cash.

i. The company sold office supplies for \)3,000 and received \(2,000 cash and \)1,000 on credit.

j. The company provided services for $6,000 cash

Short answer

Common stock is the smallest unit of the capital of the business. The correct explanation for the transaction is option D, which is the amount invested by the owner in the common stock using cash.

Step-by-step solution

Definition of Common Stock

Common stock is defined as the smallest unit into which the capital of the company is divided and they come with voting rights

Explanation for the correct option

The correct explanation for this transaction will be the explanation D

In the accounting equation, the cash item of the asset column is increasing with the amount of $40,000 and the common stock item of the equity column is increasing by the amount of $40,000. This shows the investment made by the owner in cash for the exchange of its common stock for the amount of $40,000. Hence, option D is the correct explanation for the transaction.