Question

Sheridan Company, a computer services company, entered into these transactions during May 2017, its first month of operations.

1. Stockholders invested $35,000 in the business in exchange for common stock of the company.
2. Purchased computers for office use (recorded as Equipment) for $32,900 from Ladd on account.
3. Paid $3,600 cash for May rent on storage space.
4. Performed computer services worth $18,100 on account.
5. Performed computer services for Wharton Construction Company for $5,900 cash.
6. Paid Western States Power Co. $7,100 cash for energy usage in May.
7. Paid Ladd for the computers purchased in (2).
8. Incurred advertising expense for May of $1,800 on account.
9.
Received $11,900 cash from customers for contracts billed in (4).

Using the following tabular analysis, show the effect of each transaction on the accounting equation. Put explanations for changes to revenues or expenses in the right-hand column. (If a transaction causes a decrease in Assets, Liabilities or Stockholders' Equity, place a negative sign (or parentheses) in front of the amount entered for the particular Asset, Liability or Equity item that was reduced.)

Answer 1

Sheridan Company

NUMBER ASSET LIABILITY EQUITY EXPLANATION

$ $ $

1 35,000 35,000 The issue of stock for cash would involve increase in asset and an increase in equity component of the company.

2 32,900 32,900 The purchase of equipment on credit would increase the asset of the company and also increase the liability as it was purchased on account.

3 -3600 -3600 Payment of rent which is an expense would involve an outflow of cash thus reducing the cash component in asset and reduce the retained earnings of the company that would be recorded under stockholders' equity

4 18100 18100 The inflow from computer services is a revenue to the company and under asset would increase the account receivable while on the equity side it would also increase the retained earnings of the company

5 5900 5900 The inflow from computer services is a revenue to the company and under asset would increase the cash component since cash was paid while on the equity side it would also increase the retained earnings of the company

6 -7100 -7100 Payment for energy which is an expense would involve an outflow of cash thus reducing the cash component in asset and reduce the retained earnings of the company that would be recorded under stockholders' equity

7 -32,900 -32,900 The payment for the equipment would reduce the cash component and also reduce the liability component as the debt would have cleared off

8 3600 -3600 Advertising rent incurred on account would increase the liability component and also reduce the retained earnings under shareholders equity

9 11900 -11900 Being increase in cash from payment of services and reducing the liability owed

Step-by-step explanation:

Assets = Cash, Equipment, Account receivable

Liability = Account payable

Stockholders' equity = common stock, retained earnings (revenue, expenses)