Question

A company received $11,000 cash in exchange for 200 shares of the company’s common stock. What would the effect of this transaction on the current year’s accounting equation? Select one: A. No effect on Assets; $11,000 decrease in Liabilities; $11,000 increase in Stockholders’ Equity B. $11,000 increase in Assets; No effect on Liabilities; $11,000 increase in Stockholders’ Equity C. No effect on Assets; $11,000 increase in Liabilities; $11,000 decrease in Stockholders’ Equity D. $11,000 increase in Assets; $11,000 increase in Liabilities; No effect on Stockholders’ Equity

Answer 1

Answer:

B. $11,000 increase in Assets; No effect on Liabilities; $11,000 increase in Stockholders’ Equity

Explanation:

As the company received cash in exchange for the common stock. So, it affect the accounting equation which is shown below:

Total Assets = Total liabilities + Total  stockholder equity

The journal entry is shown below for better understanding:

Cash A/c Dr XXXXX

     To Common stock XXXXX

     To Additional Paid-in capital - in excess of  par XXXXX

(Being cash is received)

So, it would not impact the total liabilities