Final answer:
The sale of stock by Gumwrapper Co. increases both the company's assets (cash) and shareholders' equity without affecting liabilities, therefore keeping the accounting equation (Assets = Liabilities + Shareholders' Equity) in balance. The transaction is recorded with a credit to equity and a debit to cash, representing the company's receipt of funds from selling the stock and the increase in ownership interests held by the investors.
Step-by-step explanation:
When Gumwrapper Co. sold its stock to investors on April 30 of this year, it affected the accounting equation by increasing both the assets and the shareholders' equity. The sale of stock results in the company receiving cash (an asset), and at the same time, it increases the shareholders' equity because new stock is issued. The accounting equation, which states that Assets = Liabilities + Shareholders' Equity, remains in balance, but the individual components of equity and assets change.
The transaction typically involves a credit to a type of equity account (such as Common Stock or Additional Paid-In Capital) and a debit to the Cash account. This equity financing is a critical aspect of raising capital for a company, as it allows the company to operate without incurring debt, thus maintaining a more favorable debt-to-equity ratio. Moreover, the investors who purchased the stock are now part-owners of Gumwrapper Co. and will be expecting a return on their investment, either in the form of dividends or capital gains, as they may sell the stock at a higher price than they purchased it.