Andrea Apple opened Apple Photography on January 1 of the current year. During January, the following transactions occurred and were recorded in the company’s books: 1. Andrea invested $13,500 cash in the business in exchange for common stock. 2. Andrea contributed $20,000 of photography equipment to the business in exchange for common stock. 3. The company paid $2,100 cash for an insurance policy covering the next 24 months. 4. The company received $5,700 cash for services provided during January. 5. The company purchased $6,200 of office equipment on credit. 6. The company provided $2.750 of services to customers on account. 7. The company paid cash of $1,500 for monthly rent. 8. The company paid $3,100 on the office equipment purchased in transaction #5 above. 9. Paid $275 cash for January utilities.
The Correct Answer and Explanation is :
The given transactions involve various activities in the business, such as investments, expenses, and revenue. Below is the breakdown of each transaction, its impact on the company’s financial records, and a general accounting explanation for each:
- Andrea invested $13,500 cash in the business in exchange for common stock.
- Impact: Increases cash by $13,500 and increases common stock by $13,500. This represents the initial investment by Andrea into the business.
- Andrea contributed $20,000 of photography equipment to the business in exchange for common stock.
- Impact: Increases photography equipment by $20,000 and increases common stock by $20,000. This represents a non-cash contribution, which adds to both the company’s assets and stockholder’s equity.
- The company paid $2,100 cash for an insurance policy covering the next 24 months.
- Impact: Decreases cash by $2,100 and increases prepaid insurance by $2,100. Since the policy covers the next 24 months, this is recorded as a prepaid asset and will be expensed over time.
- The company received $5,700 cash for services provided during January.
- Impact: Increases cash by $5,700 and increases service revenue by $5,700. This represents revenue earned from services provided to customers in January.
- The company purchased $6,200 of office equipment on credit.
- Impact: Increases office equipment by $6,200 and increases accounts payable by $6,200. The company now owes money for the office equipment purchased on credit.
- The company provided $2,750 of services to customers on account.
- Impact: Increases accounts receivable by $2,750 and increases service revenue by $2,750. This represents services performed for customers who have not yet paid, creating a receivable.
- The company paid cash of $1,500 for monthly rent.
- Impact: Decreases cash by $1,500 and increases rent expense by $1,500. This is a monthly operating expense.
- The company paid $3,100 on the office equipment purchased in transaction #5.
- Impact: Decreases cash by $3,100 and decreases accounts payable by $3,100. This is the payment made to settle part of the outstanding liability for the office equipment purchased.
- Paid $275 cash for January utilities.
- Impact: Decreases cash by $275 and increases utilities expense by $275. This is a utility payment for the month.
Summary:
After recording all transactions, the company’s assets (cash, equipment, accounts receivable, prepaid insurance) and liabilities (accounts payable) are affected, as well as equity (common stock, retained earnings). The income statement will reflect revenue from services provided and expenses like rent and utilities.