Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

2. Transaction Analysis

Journal Entries: Business Formation Example

Financial Accounting

2. Transaction Analysis

Journal Entries: Business Formation Example

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Multiple Choice

Larned Corporation was formed by issuing $10,000 of common stock for cash and borrowing $5,000 from a bank. Which of the following journal entries correctly records these transactions?

Debit Cash $5,000; Credit Common Stock $5,000

Debit Cash $15,000; Credit Common Stock $10,000; Credit Notes Payable $5,000

Debit Common Stock $10,000; Debit Notes Payable $5,000; Credit Cash $15,000

Debit Cash $10,000; Debit Notes Payable $5,000; Credit Common Stock $15,000

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Verified step by step guidance

Step 1: Understand the transactions involved. Larned Corporation issued $10,000 of common stock for cash and borrowed $5,000 from a bank. These transactions affect the company's cash account, common stock account, and notes payable account.

Step 2: Analyze the impact of issuing common stock for cash. When common stock is issued, the company receives cash (an asset) and increases its equity (common stock). The journal entry for this transaction would be: Debit Cash $10,000 (increase in asset) and Credit Common Stock $10,000 (increase in equity).

Step 3: Analyze the impact of borrowing $5,000 from the bank. Borrowing money increases the company's cash (an asset) and creates a liability (notes payable). The journal entry for this transaction would be: Debit Cash $5,000 (increase in asset) and Credit Notes Payable $5,000 (increase in liability).

Step 4: Combine the two transactions into a single journal entry. Since both transactions affect the cash account, the total cash received is $15,000 ($10,000 from issuing common stock + $5,000 from borrowing). The combined journal entry would be: Debit Cash $15,000, Credit Common Stock $10,000, and Credit Notes Payable $5,000.

Step 5: Verify the journal entry. Ensure that the total debits equal the total credits to maintain the accounting equation. In this case, Debit Cash $15,000 equals Credit Common Stock $10,000 + Credit Notes Payable $5,000, confirming the journal entry is correct.