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. No par common stock is issued.
2. Treasury stock is sold at cost for cash (assume the cost method).
3. Treasury shares of preferred stock are purchased (assume the cost method).
4. A payment date occurs for a cash dividend.

Answer 1

1.No par issue of common stock -stockholders' equity increases(I)

2.Sale of treasury stock at cost-stockholders' equity increases(I)

3.Purchase of preferred shares-reduces stockholders' equity(D)

4.Payment of cash dividend-no impact on stockholders' equity(NE)

Step-by-step explanation:

Considering the first transaction of no par common stock issuance,this would increase the value of common stock ,hence stockholders' equity would increase.

Treasury stock sale would increase the stockholders' equity since the company has to receive cash consideration from the affected investors and also reduce treasury stock and concurrently increase total paid-in capital.

Purchase of treasury stock implies reduction in cash and also increase in treasury stock of prefered stock which is negative adjustment to total paid-in capital and retained earnings.

A payment of cash dividend dividend does any affect shareholders' equity since the retained earnings would have been debited at declaration date and dividend payable credited.

Answer 2

Answer: Please refer to Explanation

Step-by-step explanation:

1. No par common stock is issued. NO EFFECT (NE)

There is no effect because this neither increases nor does it reduce Equity.

2. Treasury stock is sold at cost for cash (assume the cost method). INCREASE (I).

This transaction increases equity as Treasury stock is being put into the market. Treasury stock is equity in the company that the company had repurchased.

3. Treasury shares of preferred stock are purchased (assume the cost method). DECREASE (I)

Buying Treasury whether Preferred or Ordinary reduces equity in the company as the company is essentially taking back ownership from owners.

4. A payment date occurs for a cash dividend. DECREASE (D)

Paying out dividends to shareholders has the effect of reducing equity.