Question

Daffy Duct, Inc. issued 10,000 shares of no-par value common stock at $10 per share. Miss Hap, the bookkeeper, recorded the transaction with a $100,000 debit to Cash and $100,000 credit to Common stock. Which of the following statements about this situation is correct?A.Total assets will be overstated.B.This entry is correct.C.Total stockholders' equity will be overstated.D. Total liabilities will be understated.

Answer 1

Answer:

B

Explanation:

When a company issues shares, ‘cash’ is debited because money has come into the firm (debit means addition). ‘Equity’ is credited however because it is money the business is owing to the business owners (credit means negative)

Equity is always a credit balance when new shares are issued. It means the business is owing more to the business owners.

Note that Equity is a credit balance (in negative position) while Asset is a debit balance (positive)

In our case, we have added more business owners by getting more money to the business to the tune of $100,000. We will therefore credit equity by -$100,000). Since money came in, we also debit cash by adding an equivalent +$100,000.  

The entry is therefore balanced and correct!