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?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
Kiley Corporation was formed in 2022. The owners invested \$50,000 cash in exchange for common stock. Which of the following is the correct journal entry to record this transaction?
A
Debit Cash \$50,000; Credit Common Stock \$50,000
B
Debit Common Stock \$50,000; Credit Cash \$50,000
C
Debit Retained Earnings \$50,000; Credit Cash \$50,000
D
Debit Cash \$50,000; Credit Revenue \$50,000
Verified step by step guidance1
Step 1: Understand the nature of the transaction. The owners are investing cash into the corporation in exchange for common stock. This is an equity transaction, not a revenue or retained earnings transaction.
Step 2: Identify the accounts involved. The two accounts affected are 'Cash' (an asset account) and 'Common Stock' (an equity account). Cash increases because the corporation receives money, and Common Stock increases because the corporation issues stock.
Step 3: Determine the type of entry for each account. Since Cash is increasing, it will be debited. Common Stock, representing an increase in equity, will be credited.
Step 4: Write the journal entry. The journal entry will be: Debit Cash \$50,000; Credit Common Stock \$50,000. This reflects the increase in assets and equity due to the investment.
Step 5: Verify the entry. Ensure that the debit and credit amounts are equal (\$50,000 each) and that the accounts used correctly reflect the nature of the transaction (Cash for the asset increase and Common Stock for the equity increase).
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