Question

Listed below are various transactions that a company incurred during the current year. Select the impact on total stockholders’ equity for each scenario. Specifically state whether stockholders’ equity would increase (I), decrease (D), or have no effect (NE) as a result of each transaction listed below. Consider each transaction independently.

(1) A small stock dividend is declared
(2) A small stock dividend is distributed.
(3) Treasury stock is sold above cost for cash (assume the cost method).
(4) Treasury shares of preferred stock are purchased (assume the cost method)

Answer 1

(1) A small stock dividend is declared-No Effect (NE)

(2) A small stock dividend is distributed-No Effect (NE)

(3) Treasury stock is sold above cost for cash (assume the cost method)-Increase (I)

(4) Treasury shares of preferred stock are purchased (assume the cost method)-Decrease (D)

Step-by-step explanation:

A small stock dividend is declared

When Stock dividend is declared there is no effect on the equity of the stockholder.

A small stock dividend is distributed

When stock dividend is distributed. The change in retained earnings is same as change in common stock value. Retained earnings decrease by an amount equal to common stock value. The final result of the transaction is zero.

Treasury stock is sold above cost for cash

When treasury stock is sold at more than the cost of shares, paid in capital From treasury stock is credited by the amount of cash received in excess of cost. The final value of equity Increases. Also when treasury stock are sold then value of stock increases and value of treasury stock decreases. Treasury stock is a negative adjustment hence when it decreases, value of equity increases.

Treasury stock of preferred stock are purchased

When Treasury stock are purchased then Treasury stock is Debited and cash is credited. Treasury stock is shown as a negative adjustment in shareholders equity section of balance sheet which reduces the balance of equity.