Question

The following events occurred for Johnson Company:

1. Received investment of cash by organizers and distributed to them 1,000 shares of $1 par value common stock with a market price of $40 per share.
2. Purchased $15,000 of equipment, paying $3,000 in cash and owing the rest on accounts payable to the manufacturer.
3. Borrowed $10,000 cash from a bank.
4. Loaned $800 to an employee who signed a note.
5. Purchased $13,000 of land; paid $4,000 in cash and signed a mortgage note for the balance.

Required:

For each of the events (a) through (e), perform transaction analysis and indicate the account, amount, and direction of the effect (+ for increase and − for decrease) on the accounting equation. Check that the accounting equation remains in balance after each transaction. (If no impact on accounting equation leave cells blank.)

Answer 1

Accounting Equation = Total assets = Liabilities + Stockholder's Equity
Transaction	Assets		=	Liabilities		+	Stockholders Equity
a.	Cash	$40,000					Common stock	$1,000
							Additional paid in capital	$39,000
b.	Equipment	$15,000		Accounts payable	$12,000
	Cash	-$3,000
c.	Cash	$10,000		Notes payable	$10,000
d.	Notes receivable	$800
	Cash	-$800
e.	Land	$13,000		Mortgage notes payable	$9,000
	Cash	-$4,000
Explanation
a. Investment of cash would increase the cash balance and since common stock is issued the common stock would increase to the extent of par value of stock and balance to additional paid in capital
b. Equipment purchased would increase the equipment asset, cash payment would reduce the cash balance and purchase on credit would increase the liability
c. Borrowing loan would increase cash balance due to receipt of cash and liability would increase as loan is taken
d. Amount lend to employee would reduce the cash balance and since the amount is receivable the assets of the company would increase.
e. Land purchased would increase the land asset, cash payment would reduce the cash balance and purchase on credit would increase the liability