Multiple Choice
When the lessee (tenant) signs a lease for office space and pays the first month's rent in advance, which of the following journal entries should the lessee record?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
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?
A
Debit Owner's Capital \$10,000; Credit Cash \$10,000; Credit Equipment \$5,000
B
Debit Cash \$10,000; Debit Equipment \$5,000; Credit Owner's Capital \$15,000
C
Debit Cash \$5,000; Debit Equipment \$10,000; Credit Owner's Capital \$15,000
D
Debit Owner's Capital \$15,000; Credit Cash \$10,000; Credit Equipment \$5,000
Verified step by step guidance1
Step 1: Understand the nature of the transaction. Sanyu Sony is investing cash and equipment into the business. This means the business is receiving assets (cash and equipment), and the owner's equity (Owner's Capital) is increasing as a result of the owner's contribution.
Step 2: Identify the accounts involved. The accounts affected are: (1) Cash (an asset account), (2) Equipment (an asset account), and (3) Owner's Capital (an equity account).
Step 3: Determine the type of each account and the effect of the transaction. Cash and Equipment are assets, and they will increase, so they are debited. Owner's Capital is an equity account, and it will increase, so it is credited.
Step 4: Apply the accounting equation: Assets = Liabilities + Owner's Equity. In this case, the increase in assets (Cash and Equipment) is balanced by the increase in Owner's Equity (Owner's Capital).
Step 5: Record the journal entry. Debit Cash for \$10,000, Debit Equipment for \$5,000, and Credit Owner's Capital for the total contribution of \$15,000. This ensures the transaction is properly recorded in accordance with the double-entry accounting system.
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