Question

On 1st January 2020 Tom Shanks started trading as Shanks Real Estate, and completed the following transactions regarding the business in the first month:

1. Jan 1: Tom Shanks transferred cash from his personal bank account to the business bank account in order to start operations, $25,000.
2. Jan 4: The business paid a year’s rent in advance for office space, $11,880
3. Jan 5: The business purchased a motor vehicle, $22,000. A deposit of $6,000 was paid with the remainder financed by a bank loan.
4. Jan 14: Earned first sales commission and received cash, $16,500
5. Jan 18: Paid motor vehicle expenses, $55
6. Jan 20: Tom Shanks used $60 from the business’ account to buy flowers for his wife Rita
7. Jan 25: Earned sales commission and sent the client an invoice which will be paid in February, $27,500

For the transaction on January 5th prepare a general journal entry (see Exhibit 5.3 p. 191 for format)

Answer 1

Answer: Journal Entry for transaction on January 5th, 2020.

JOURNAL
DATE	ACCOUNT	DEBIT	CREDIT
JAN 05, 2020	Motor Vehicle	$       22,000
	Bank		$         6,000
	Bank loan		$       16,000
	(Motor Vehicle purchased for $22000, paid $6000 from bank and $16000 through Bank loan.)

NOTES :

• Motor vehicle is debited as it is an asset and purchase of an asset increases its value .
• As the purchase of motor vehicle is financed partly by deposited amount in bank and partly through bank loan ,Thus they both are credited.