Valor Company issued 5,000 shares of $1 par common stock for $30 per share, prov

Question

Valor Company issued 5,000 shares of $1 par common stock for $30 per share, providing the company with $150,000 in cash. What effect, in addition to the increase in cash, does this transaction have on the accounting equation for Valor?

Common Stock increases $5,000; Gain on Sale of Common Stock increases $145,000.

Common Stock increases $5,000; Additional Paid-in Capital—Common increases $145,000.

Common Stock increases $150,000.

Common Stock increases $5,000; Retained Earnings increases $145,000.

Nordic Exports Inc. reported net income of $150,000 for 2016, but its cash balance decreased $40,000. Which financial statement should Nordic Exports’ management refer to for an explanation of this situation?

a.Statement of Cash Flows

b.Balance Sheet

c.Statement of Retained Earnings

d.Income Statement

Explanation / Answer

Question 1 - Common Stock increases $5,000; Additional Paid-in Capital—Common increases $145,000.

The total par value collected by selling the stocks would be recorded under common stock. So $1 par value and 5000 stocks sold --> $5000 in common stock account.

Remaining premium over par value is recorded as Additional paid in capital = $(30 - 1) * 5000 = $145,000

Remember retained earnings is increased when net income flows into there after payment of dividends.

Question 2 - a. Statement of cash flows

In this question, even when net income is rising, cash balance has declined, which might be due to n number of reasons like most of the sales made were credit sales, or there was some repayment of existing debt or liabilities or extraordinary dividends were paid or company made some investments, etc. The exact reason can be ascertained by assessing the cash flow statement.

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