$36,000 cash was invested in the company to begin the business in exchange for common stock.

Question

BlackTom AI · Accepted Answer

Question restatement: A $36,000 cash investment is made in the company to begin the business in exchange for common stock. Which journal entry represents this transaction?

Option 1: Dr. Common Stock 36,000     Cr. Cash 36,000
This entry incorrectly increases (debits) Common Stock and decreases (credits) Cash. In an investment by the owner, Cash is the asset being received, so Cash should be debited (increased) and Common Stock credited (increased). The order and the accounts are reversed here, making this entry inaccurate for recording owner capital contributed in exchange for stock.

Option 2: Dr. Asset 36,000     Cr. Equity 36,000
This option uses generic labels (Asset and Equity) rather than specific accounts. While it captures the idea that cash (an asset) increases and equity (owner's claim) increases, it lacks the specificity of standard accounts like Cash and Common Stock. In proper financial reporting, we specify Cash as the asset, and Common Stock as the equity account credited, not a generic Asset and an unspecified Equity.

Option 3: Dr. Cash 36,000     Cr. Common Stock 36,000
This is the standard and correct entry. The business receives cash (an asset), so Cash is debited to show an increase. The corresponding increase in owner’s equity is recorded by crediting Common Stock, which represents the issuance of stock in exchange for the contributed capital. The amounts balance, satisfying the double-entry accounting rule.

Option 4: None of the above
Since Option 3 accurately records the transaction with the correct accounts and the proper debit and credit amounts, this option is not correct. The statement in Option 3 provides the valid journal entry for the described event.

$36,000 cash was invested in the company to begin the business in exchange for common stock.

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