Final answer:
The issuance of preferred stock by Equinox Outdoor Wear for cash increases the company's assets and equity, as it raises cash without creating any liabilities.
Step-by-step explanation:
When Equinox Outdoor Wear issues 1,000 shares of its $0.01 par value preferred stock for cash at $23 per share, the company is conducting a financial transaction that impacts its balance sheet. The issuance of preferred shares for cash increases the company's assets, specifically cash, by $23,000 (1,000 shares × $23 per share). Simultaneously, there is an increase in the equity section of the balance sheet, as the preferred stock account will be credited. Since there is no creation of a liability and the cash asset increases, the correct answer to the effects on the financial statements is that it increases assets and increases equity.
In summary, the issuance of preferred stock for cash leads to an increase in cash and an increase in the shareholders' equity, as the company receives money in exchange for issuing ownership shares to the investors. No liabilities are created in this transaction. The entry in the journal would be a debit to Cash and a credit to Preferred Stock.