Chapter 3, Problem 2CP

To determine

To prepare: The journal entries for each transaction.

Explanation of Solution

Journal:

Journal is the book of original entry. Journal consists of the day today financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Accounting Equation:

The accounting equation implies the relationship between the assets, liabilities, and the stockholders equity. The balance of both the assets and the liabilities, stockholders equity must be equally balanced. The accounting equation is as follows;

$\boxed{\text{Assets = Liabilities + Stockholders Equity}}$

1. a. Journalize theissuance of common stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
May, 1	Cash (A+)	30,000
	Common stock (SE+)		30,000
	(To record the issuance of common stock to investors)

Table (1)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $30,000.
• Common stock is a component of stockholder equity account. Thus, an increase in common stock increases the stockholders equity account. Hence, common stock account is being credited to increase its balance by $30,000.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(+\text{Cash \$30,000}\right)\end{array}\right\}\text{ = Liabilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \left(\text{+Common stock \$30,000}\right)\end{array}\right\}$

1. b. Journalize theamount borrowed from the bank:

Date	Account Title and Explanation	Debit ($)	Credit ($)
May, 15	Cash (A+)	50,000
	Notes payable (L+)		50,000
	(To record the amount borrowed)

Table (2)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $50,000.
• Notes payable is a liability account. Thus, an increase in notes payable increases the liability account. Hence, notes payable account is being credited to increase its balance by $50,000.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(\text{+Cash\$50,000}\right)\end{array}\right\}\text{ = }\left\{\begin{array}{l}\text{Liabilities}\\ \left\{\text{+Notes payable\$50,000}\right\}\end{array}\right\}+\text{Stockholders' Equities}$

1. c. Journalize thePayment of Insurance:

Date	Account Title and Explanation	Debit ($)	Credit ($)
May, 32	Prepaid insurance (A+)	2,400
	Cash (A-)		2,400
	(To record the insurance amount paid in advance )

Table (3)

• Prepaid insurance is an asset account. Thus, an increase in prepaid insurance increases the asset account. Hence, debit prepaid insurance account by $2,400.
• Cash is an asset account. Thus, a decrease in cash decreases the asset account. Hence, credit cash account by $2,400.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(\text{(–Cash \$2,400)+(+Prepaid insurance\$2,400)}\right)\end{array}\right\}\text{ = Liabilities + Stockholder's equity}$

1. d. Journalize thefurniture purchased on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 3	Equipment (A+)	15,000
	Accounts payable (L+)		15,000
	(To record the purchase of equipment on account)

• Equipment is an asset account. Thus, an increase in equipment increases the asset account. Hence, debit equipment account by $15,000.
• Accounts payable is a liability account. Thus, an increase in accounts payable increases the liability account. Hence, account payable account is being credited to increase its balance by $15,000.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(\text{+Equipment\$15,000}\right)\end{array}\right\}\text{ = }\left\{\begin{array}{l}\text{Liabilities}\\ \left\{\text{+Accounts payable\$15,000}\right\}\end{array}\right\}+\text{Stockholders' Equities}$

1. e. Journalize theadvertisement expenses:

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 5	Advertisement expenses (E+, SE-)	250
	Cash (A-)		250
	(To record the advertisement expenses )

• Advertisement expense is an expense account which comes under Retained earnings in stockholder’s equity. Thus, an increase in advertisement expense account decreases the stockholder’s equity account. Hence, advertisement expenses account is being debited to increase its balance by $250.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $250.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(\text{–Cash \$250}\right)\end{array}\right\}\text{ = Liabilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \left(\text{–Advertisement expense \$250}\right)\end{array}\right\}$

1. f. Journalize theservice performed for cash:

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 9	Cash (A+)	400
	Service revenue (R+, SE+)		400
	(To record the service performed)

• Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $400.
• Service revenue is a stockholder’s equity account. Thus, an increase in service revenue increases the stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $400.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(\text{+Cash \$400}\right)\end{array}\right\}\text{ = Liabilities + }\left\{\begin{array}{l}\text{Stockholders' Equities}\\ \left(+\text{Service revenue \$400}\right)\end{array}\right\}$

1. g. Journalize thepayment made for the purchase of furniture on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
June, 9	Accounts payable (L-)	15,000
	Cash (A-)		15,000
	(To record the payment made for the equipment purchased on account )

• Accounts payable is a liability account. Thus, a decrease in accounts payable decreases the liability account. Hence, account payable account is being debited to decrease its balance by $15,000.
• Cash is an asset account. Thus, a decrease in cash account decreases the asset account. Hence, cash account is being credited to decrease its balance by $15,000.

For the above journal entry the accounting equation is affected as below:

$\left\{\begin{array}{l}\text{Assets}\\ \left(-\text{Cash\$15,000}\right)\end{array}\right\}\text{ = }\left\{\begin{array}{l}\text{Liabilities}\\ \left\{-\text{Accounts payable\$15,000}\right\}\end{array}\right\}+\text{Stockholders' Equities}$