Two friends decide to launch a new business by investing $25,000 each in Hot Spot Tanning. They are given shares of stock as evidence of their ownership interest. What effect does this transaction have on the accounting equation?

Question

Quizplus · Accepted Answer

The investment by the two friends increases the company's assets (cash) by $50,000 (25,000 + 25,000), and also increases the contributed capital (equity) by the same amount, since they each received shares of stock as evidence of their ownership. There is no impact on liabilities or retained earnings. Therefore, Option B, "Assets and contributed capital increase," is the correct choice.

Two Friends Decide to Launch a New Business by Investing