Question

Rich buys 100 shares, $1 par value common stock for $5 per share. What will be the effect of this transaction on the financial statements?

Answer 1

The purchase of 100 shares of $1 par value common stock for $5 per share will increase the company's assets and shareholders' equity, with no effect on the income statement.

Step-by-step explanation:

When Rich buys 100 shares of $1 par value common stock for $5 per share, the effect of this transaction on the financial statements is as follows:

1. The assets of the company increase. This is because the company receives cash of $500 (100 shares * $5 per share), which is recorded as an increase in the cash account on the balance sheet.
2. The shareholders' equity also increases. This is because the company issues 100 shares of common stock, which is recorded as an increase in the common stock account on the balance sheet.
3. There is no effect on the income statement as the purchase of the stock does not generate any revenue or expenses.