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Chapter 1: Q12E-c (page 36)

For each transaction a through f, identify its impact on the accounting equation (select from 1 through 6 below).

c. The owner invests cash in the business in exchange for its common stock

1. Decreases an asset and decreases equity.

2. Increases an asset and increases liability.

3. Decreases an asset and decreases liability.

4. Increases an asset and decreases an asset.

5. Increases liability and decreases equity.

6. Increases an asset and increases equity.

Short Answer

Expert verified

The shares are the smallest units into which the capital of the business is divided and the correct impact will be impact number 6.

Step by step solution

01

Definition of Shares

Shares refer to that financial instrument that makes the capital of the business organisation.

02

Identification of the impact

The correct impact on the accounting equation will be impact number 6. Cash is an asset and the owner of the company is bringing in the cash for the exchange of common stock. Hence, this will impact the accounting equation by increasing the cash and the equity of the company.

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Most popular questions from this chapter

Gabi Gram started The Gram Co., a new business that began operations on May 1. The Gram Co. completed the following transactions during its first month of operations.

May 1 G. Gram invested \(40,000 cash in the company in exchange for its common stock.

1 The company rented a furnished office and paid \)2,200 cash for May’s rent.

3 The company purchased \(1,890 of office equipment on credit.

5 The company paid \)750 cash for this month’s cleaning services.

8 The company provided consulting services for a client and immediately collected \(5,400 cash.

12 The company provided \)2,500 of consulting services for a client on credit.

15 The company paid \(750 cash for an assistant’s salary for the first half of this month.

20 The company received \)2,500 cash payment for the services provided on May 12.

22 The company provided \(3,200 of consulting services on credit.

25 The company received \)3,200 cash payment for the services provided on May 22.

26 The company paid \(1,890 cash for the office equipment purchased on May 3.

27 The company purchased \)80 of advertising in this month’s (May) local paper on credit; cash payment is due June 1.

28 The company paid \(750 cash for an assistant’s salary for the second half of this month.

30 The company paid \)300 cash for this month’s telephone bill.

30 The company paid \(280 cash for this month’s utilities.

31 The company paid \)1,400 cash in dividends to the owner (sole shareholder).

Required 3. Prepare the statement of cash flows for the month of May

Lita Lopez started Biz Consulting, a new business, and completed the following transactions during its first year of operations.

a. Lita Lopez invested \(70,000 cash and office equipment valued at \)10,000 in the company in exchange for its common stock.

b. The company purchased an office suite for \(40,000 cash.

c. The company purchased office equipment for \)15,000 cash.

d. The company purchased \(1,200 of office supplies and \)1,700 of office equipment on credit.

e. The company paid a local newspaper \(500 cash for printing an announcement of the office’s opening.

f. The company completed a financial plan for a client and billed that client \)2,800 for the service.

g. The company designed a financial plan for another client and immediately collected a \(4,000 cash fee.

h. The company paid \)3,275 cash in dividends to the owner (sole shareholder).

i. The company received \(1,800 cash as partial payment from the client described in transaction f.

j. The company made a partial payment of \)700 cash on the equipment purchased in transaction d.

k. The company paid $1,800 cash for the office secretary’s wages for this period.

Required 2. Determine the company’s net income.

On October 1, Ebony Ernst organized Ernst Consulting; on October 3, the owner contributed \(84,000 in assets in exchange for its common stock to launch the business. On October 31, the company’s records show the following items and amounts. Use this information to prepare an October income statement for the business.

Cash . . . . . . . . . . . . . . . . . . . . . . . \)11,360

Cash dividends . . . . . . . . . . . . . . . . . . . . . . $ 2,000

Accounts receivable . . . . . . . . . . . 14,000

Consulting revenue . . . . . . . . . . . . . . . . . . 14,000

Office supplies . . . . . . . . . . . . . . . 3,250

Rent expense . . . . . . . . . . . . . . . . . . . . . . . 3,550

Land . . . . . . . . . . . . . . . . . . . . . . . . 46,000

Salaries expense . . . . . . . . . . . . . . . . . . . . . 7,000

Office equipment . . . . . . . . . . . . . 18,000

Telephone expense . . . . . . . . . . . . . . . . . . 760

Accounts payable . . . . . . . . . . . . . 8,500

Miscellaneous expenses . . . . . . . . . . . . . . 580

Common stock . . . . . . . . . . . . . . . 84,000

Lita Lopez started Biz Consulting, a new business, and completed the following transactions during its first year of operations.

a. Lita Lopez invested \(70,000 cash and office equipment valued at \)10,000 in the company in exchange for its common stock.

b. The company purchased an office suite for \(40,000 cash.

c. The company purchased office equipment for \)15,000 cash.

d. The company purchased \(1,200 of office supplies and \)1,700 of office equipment on credit.

e. The company paid a local newspaper \(500 cash for printing an announcement of the office’s opening.

f. The company completed a financial plan for a client and billed that client \)2,800 for the service.

g. The company designed a financial plan for another client and immediately collected a \(4,000 cash fee.

h. The company paid \)3,275 cash in dividends to the owner (sole shareholder).

i. The company received \(1,800 cash as partial payment from the client described in transaction f.

j. The company made a partial payment of \)700 cash on the equipment purchased in transaction d.

k. The company paid $1,800 cash for the office secretary’s wages for this period.

Required 1. Create the following table similar to the one in Exhibit 1.9 Use additions and subtractions within the table to show the dollar effects of each transaction on individual items of the accounting equation. Show new balances after each transaction.

Sanyu Sony started a new business and completed these transactions during December.

Dec. 1 Sanyu Sony transferred \(65000 cash from a personal savings account to a checking account in the name of Sony Electric in exchange for its common stock.

2 The company rented office space and paid \)1000 cash for the December rent.

3 The company purchased \(13000 of electrical equipment by paying \)4800 cash and agreeing to pay the \(8200 balance in 30 days.

5 The company purchased office supplies by paying \)800 cash.

6 The company completed electrical work and immediately collected \(1200 cash for these services.

8 The company purchased \)2530 of office equipment on credit.

15 The company completed electrical work on credit in the amount of \(5000.

18 The company purchased \)350 of office supplies on credit.

20 The company paid \(2530 cash for the office equipment purchased on December 8.

24 The company billed a client \)900 for electrical work completed; the balance is due in 30 days.

28 The company received \(5000 cash for the work completed on December 15.

29 The company paid the assistant’s salary of \)1400 cash for this month.

30 The company paid \(540 cash for this month’s utility bill.

31 The company paid \)950 cash in dividends to the owner (sole shareholder).

Required 2. Prepare the income statement and the statement of retained earnings for the current month, and the balance sheet as of the end of the month.
See all solutions

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