A shareholder invested $75,000, made up of $50,000 in cash and a vehicle worth $25,000, in a new company and received shares in exchange.What is the effect of this transaction on the accounting equation?
A)Assets increases by $75,000 and owners' equity increases by $75,000.
B)Assets increases by $75,000 owners' equity increases by $50,000, and liabilities increases by $25,000.
C)Assets increases by $50,000 and owners' equity increases by $50,000.
D)Assets increases by $50,000 and liabilities increases by $50,000.

Question

Quizplus · Accepted Answer

The transaction increases both the assets and owners' equity by $75,000. The $50,000 in cash increases the company's cash or other asset account, while the $25,000 vehicle is also an asset. The shareholder's investment of $75,000 in exchange for shares increases the owners' equity by the same amount. Thus, there is no effect on liabilities, and option B can be eliminated as a possible answer. The transaction does not involve any borrowing or increase in liabilities, so option D can also be eliminated. Therefore, the correct answer is A.

A Shareholder Invested $75,000, Made Up of $50,000 in Cash