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Worked-example setupScope and assumptions
- The fictional entity has no other assets, liabilities, revenues, expenses, or owner transactions.
- The equipment is acquired and controlled by the entity at the stated cash price.
- Alder issues no-par common stock, so the full shareholder investment is recorded in Common Stock.
- Period
- Entity formation date; both events occur on the same date
- Units
- USD
- Rounding
- Whole US dollars; no rounding required
Problem
On January 2, Alder Design receives $40,000 cash from its shareholders in exchange for no-par common stock. Alder then pays $18,000 cash for equipment it will use in the business. Determine the ending asset composition, liabilities, and equity.
Given
The company begins with no balances. Both amounts are stated in US dollars. There are no taxes, transaction costs, or other events.
Reasoning
The shareholder investment gives Alder control of $40,000 cash. It creates no creditor obligation. Assets rise by $40,000, and equity rises by $40,000. The investment is an owner transaction, not revenue. Alder therefore records the equity increase in Common Stock.
Next, identify both sides of the equipment purchase before deciding whether an expense occurred. Alder gives up $18,000 cash and receives equipment with a stated cost of $18,000. One asset decreases and another asset increases. Treating the cash payment as an immediate $18,000 expense would omit the resource just acquired.
Ending cash = $40,000 - $18,000 = $22,000
Ending equipment = $0 + $18,000 = $18,000
Total assets = $22,000 + $18,000 = $40,000
Liabilities = $0
Equity = $40,000
Result
Alder ends with $22,000 cash and $18,000 equipment. Total assets are $40,000, liabilities are zero, and equity is $40,000.
Check the accounting equation
The amounts satisfy the accounting equation:
$40,000 assets - ($0 liabilities + $40,000 equity) = $0
The equipment purchase changed the form of Alder's assets but did not change total assets or equity.
Interpretation
The shareholders' residual interest is not the $22,000 cash balance. It is the $40,000 residual after liabilities are deducted from all recognized assets. The equipment purchase leaves Alder with less cash even though total assets and equity are unchanged. The Cash and Equipment account balances show that change in asset composition.
Common wrong paths
- Set equity equal to ending cash: This ignores equipment and treats one asset account as the residual interest.
- Record an immediate $18,000 expense: This records the cash decrease but omits the equipment. Chapter 2 explains when Alder later records expense for using the equipment.
- Call the owner contribution revenue: This confuses a transaction with an owner with performance from providing goods or services.
Verified calculation · accounting equation
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- events
- 2 items
Inspect data
[
{
"asset_changes": {
"cash": 40000
},
"equity_changes": {
"owners_equity": 40000
},
"label": "owner contribution",
"liability_changes": {}
},
{
"asset_changes": {
"cash": -18000,
"equipment": 18000
},
"equity_changes": {},
"label": "cash equipment purchase",
"liability_changes": {}
}
]- opening
- 3 fields
Inspect data
{
"assets": {
"cash": 0,
"equipment": 0
},
"equity": {
"owners_equity": 0
},
"liabilities": {}
}Recomputed result
| Measure | Value |
|---|---|
| cash | 22,000 |
| equation difference | 0 |
| equipment | 18,000 |
| total assets | 40,000 |
| total equity | 40,000 |
| total liabilities | 0 |