Question

Sunland Company entered into these transactions during May 2022, its first month of operations. 1. Stockholders invested $38,000 in the business in exchange for common stock of the company. 2. Purchased computers for office use for $34,000 from Ladd on account. 3. Paid $2,200 cash for May rent on storage space. 4. Performed computer services worth $19,500 on account. 5. Performed computer services for Wharton Construction Company for $6,400 cash. 6. Paid Western States Power Co. $8,200 cash for energy usage in May. 7. Paid Ladd for the computers purchased in (2). 8. Incurred advertising expense for May of $3,300 on account. 9. Received $12,700 cash from customers for contracts billed in (4).

Answer 1

Question Completion:

Show the effect of each transaction on the accounting equation.

Answer:

Sunland Company

1. Stockholders' investment in the business = $38,000

Assets (Cash + $38,000) = Liabilities + Equity (Common Stock + $38,000)

2. Office Computers purchased on account from Ladd = $34,000

Assets (Equipment + $34,000) = Liabilities (Accounts Payable + $34,000) + Equity

3. Cash payment for May Rent = $2,200

Assets (Cash -$2,200) = Liabilities + Equity (Retained Earnings - $2,200)

4. Computer services performed on account = $19,500

Assets (Accounts Receivable + $19,500) = Liabilities + Equity (Retained Earnings + $19,500)

5. Computer services performed for cash = $6,400

Assets (Cash + $6,400) = Liabilities + Equity (Retained Earnings + $6,400)

6. Utilities for May paid $8,200

Assets (Cash - $8,200) = Liabilities + Equity (Retained Earnings - $8,200)

7. Payment to Ladd = $34,000

Assets (Cash - $34,000) = Liabilities (Accounts Payable - $34,000) + Equity

8. Advertising expense on account = $3,300

Assets (Cash - $3,300) = Liabilities + Equity (Retained Earnings - $3,300)

9. Cash received from customers = $12,700

Assets (Cash + $12,700, Accounts Receivable -$12,700) = Liabilities + Equity

Explanation:

a) Data and Calculations:

Transactions entered into during May 2022:

1. Stockholders' investment in the business = $38,000

2. Office Computers purchased on account from Ladd = $34,000

3. Cash payment for May Rent = $2,200

4. Computer services performed on account = $19,500

5. Computer services performed for cash = $6,400

6. Utilities for May paid $8,200

7. Payment to Ladd = $34,000

8. Advertising expense on account = $3,300

9. Cash received from customers = $12,700

b) The accounting equation is the basis of the double-entry system of accounting practice.  It states that at every point in time and with every transaction, the assets are equal to the liabilities plus owners' equity.  This implies that the assets are owed by creditors and stockholders.  Therefore, every business transaction by Sunland Company has a double-entry effect on the assets, liabilities, and owners' equity.