A Neverland company pays a Wonderland ¥3 million for the local franchise rights. This will result in a ______ to Wonderland’s ______.

Question

BlackTom AI · Accepted Answer

Granting a franchise creates an inflow of cash and increases the owner’s equity, so Wonderland records an increase in assets and a corresponding credit to capital.

1) Relevant knowledge points and concepts
- Double-entry bookkeeping: every transaction affects at least two accounts: one debited, one credited.
- Debit and credit rules: debits increase assets and expenses; credits increase liabilities, revenue, and owner’s equity (capital).
- Receipt of a franchise fee: cash (a current asset) increases, and the inflow represents income that ultimately increases owner’s equity (capital). Companies may record it as revenue which flows into retained earnings (part of capital).

2) Step-by-step reasoning
- Neverland pays Wonderland ¥3,000,000 for franchise rights. Wonderland receives cash.
- Increase in cash (an asset) is recorded with a debit.
- The corresponding credit records the source of that increase: an increase in equity (capital) via revenue/owner’s investment.

3) Journal entry (all intermediate steps shown)
- Debit Cash (current asset) ¥3,000,000 — this increases Wonderland’s assets.
- Credit Capital (owner’s equity) ¥3,000,000 — this records the increase in equity resulting from the franchise fee (alternatively, the company could credit Revenue and later close to Retained Earnings, but the net effect is an increase in capital).

4) Why the correct answer is correct
- The franchise fee causes a credit to Wonderland’s capital because credits increase equity. The ¥3 million received increases Wonderland’s net worth; therefore equity (capital) is credited.

5) Why other options are incorrect
- "credit; current": A credit to a current account would decrease that current asset; receiving cash increases (not credits) a current asset.
- "debit; capital": Debiting capital would decrease owner’s equity, which contradicts the receipt of income that increases equity.
- "debit; current": While cash (a current asset) is debited, this choice implies the effect is a debit to a current account as the only impact; it ignores the necessary corresponding credit to capital (equity).

6) Conclusion
The correct entry effect is a credit to Wonderland’s capital, matching the provided answer: credit; capital.

A Neverland company pays a Wonderland ¥3 million for the local franchise rights. This will result in a to Wonderland’s .Single choice

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A Neverland company pays a Wonderland ¥3 million for the local franchise rights. This will result in a ______ to Wonderland’s ______.Single choice

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