Question

Journal Entries and The Accounting Equation 1) For the following items, determine the effect of each item on the accounting equation (A = L + E) and record the appropriate journal entries for the following transactions: a. Issued common stock for $20,000 cash. b. Purchased building for $200,000 cash and a $150,000 note.

Answer 1

Following would be the journal entries:

1. Issue of common stock for cash:

Cash A/C Dr. $20,000

To Common Stock $20,000

(Being common stock issued for cash)

Effect on Accounting Equation:

Issue of stock for cash will increase cash balance by $20,000 and at the same time increase equity balance by $20,000

The equation would become:

A + $20,000 = L + E + $20,000

2. Purchased building for $200,000 cash and $150,000 note:

Building A/C Dr. $350,000

To Cash A/C $200,000

To Note Payable A/C $150,000

(Being building purchased for cash and a note issued for the unpaid balance)

Effect on Accounting Equation:

Building which is an asset, it's purchase would increase the assets side of the equation by total amount i.e $350,000.

Cash which is again an asset, would reduce the asset side of the equation by $200,000

The net effect of the above 2 items will result in an increase to the assets side of equation by $150,000

Notes Payable is a liability and hence it will raise the Liabilities by $150,000.

Thus, the equation would become:

A + 150,000 = L + 150,000 + E