Question

A company issued stock to investors for cash of $50,000. Choose the TRUE statement. A. Cash will increase $50,000 and contributed capital will increase $50,000.

B. Cash will decrease $50,000 and retained earnings will decrease $50,000.
C. Cash will increase $50,000 and retained earnings will increase $50,000.
D. Cash will decrease $50,000 and contributed capital will increase $50,000

Answer 1

When a company issues stock to investors for cash, it increases its cash account by the amount received ($50,000 in this case) as an asset.

thus correct option is C. Cash will increase $50,000 and retained earnings will increase $50,000.

Step-by-step explanation:

When a company issues stock to investors for cash, it increases its cash account by the amount received ($50,000 in this case) as an asset. Simultaneously, the company records the increase in equity through the contributed capital account, not retained earnings. Retained earnings represent accumulated profits, whereas contributed capital reflects funds received from issuing stock. Therefore, the correct accounting treatment for issuing stock for cash involves an increase in cash and a corresponding increase in contributed capital. This transaction doesn't impact retained earnings directly; they reflect profits or losses from operations over time and aren't affected by the issuance of stock. Thus, option C is the accurate representation of the accounting impact when a company issues stock for cash.

thus correct option is C. Cash will increase $50,000 and retained earnings will increase $50,000.