Question

Basic Solutions Company reported net earnings of $60,000, declared and paid cash dividends on its common stock in the amount of $40,000 during the year, and sold 3,000 shares of $2 par value common stock for $15 per share during the year. What effects would these transactions have on the stockholders' equity accounts shown below?

Retained Earnings ... Common Stock
a. ​decrease ... decrease
b. ​increase ... increase
c. ​decrease ... increase
d. ​increase ... decrease

Answer 1

Basic Solutions Company's financial transactions lead to a decrease in Retained Earnings due to payment of cash dividends and an increase in the Common Stock account due to the issuance of new shares above par value. The correct answer is c. decrease ... increase.

Step-by-step explanation:

The student is inquiring about how certain financial transactions affect stockholders' equity accounts. In this scenario, Basic Solutions Company reported net earnings of $60,000, declared and paid cash dividends on its common stock worth $40,000, and issued new shares of stock. We will examine the impact of these transactions on Retained Earnings and Common Stock accounts.

First, the payment of cash dividends would decrease Retained Earnings by $40,000. Although the net earnings increased Retained Earnings, dividends paid to shareholders reduce it.

Second, when the company sold 3,000 shares of $2 par value common stock at $15 per share, it would increase the Common Stock account by the par value of the shares issued, which is $2 × 3,000 = $6,000, and the additional paid-in capital (the amount over par value) would also increase equity but is not typically recorded under the 'Common Stock' account.

Therefore, the correct answer to the student's question is c. decrease ... increase.