Number A1 How do the following transactions affect contributed capital, retained
ID: 2439494 • Letter: N
Question
Number A1 How do the following transactions affect contributed capital, retained earnings and total shareholders' equit How do the following transactions affect contributed capital, retained earnings and total shareholders' equity (Enter"", or"none") 5 11. Issue common stock for cash 6 2. Issue preferred stock for lano 73. Announce stock dividend 8 4. Announce stock split 9 15. Announce cash dividend 10 6. Repurchase stock 11 7. Recognize unrealized gain on marketable securities 12 ]8. Recognize a loss on sale of equipment 13 5Explanation / Answer
Effects of transactions
Effect on
S.NO
Transaction
Contributed Capital
Retained Earnings
Shareholder's Capital
1
Issue Common stock for cash
+
None
+
2
Issued preferred stock for land
+
None
+
3
Announced stock dividend
+
-
None
4
Announce stock split
None
None
None
5
Announced Cash dividend
None
-
-
6
Repurchase stock
None
None
-
7
Recognize unrealized Gain on marketable securities
None
+
+
8
Recognize a loss on sale of equipment
None
-
-
General Explanation
Increase or decrease in Contributed capital affects shareholder's capital in the same way. If contributed capital increase shareholder's equity also increases. Contributed capital is a part of shareholder's equity. Similarly retained earnings are a part of shareholder's equity and changes in retained earnings affect shareholder's equity in same direction.
Specific Explanation for point
1
Issue of shares increase common stock and shareholder’s equity by same amount.
2
Preferred stock is also a contributed capital and increases shareholder's equity.
3
Stock dividend either increase contributed capital or additional paid in capital and deceases retained earnings but the effect on shareholder's equity is same. Increase in shares and paid in capital is equal to decrease in retained earnings.
4
Stock split does not affect final total of contributed capital. Only number o shares are increased but total value remains the same.
5
Cash dividend has no affect on contributed capital. Cash dividend is paid out of retained earnings so retained earnings are decrease and ultimately shareholder’s equity is decreased.
6
Repurchase of stock is also known as treasury stock. These shares are shown as a negative value in shareholder's equity and ultimately decreases shareholder's equity. Repurchased stock or treasury stock does not necessarily decrease value of Common stock and as they are shown separately as an adjustment in balance sheet.
7
Increase in profit increases retained earnings and ultimately shareholder’s equity
8
Decrease in profit decreases retained earnings and ultimately shareholder’s equity.
Effects of transactions
Effect on
S.NO
Transaction
Contributed Capital
Retained Earnings
Shareholder's Capital
1
Issue Common stock for cash
+
None
+
2
Issued preferred stock for land
+
None
+
3
Announced stock dividend
+
-
None
4
Announce stock split
None
None
None
5
Announced Cash dividend
None
-
-
6
Repurchase stock
None
None
-
7
Recognize unrealized Gain on marketable securities
None
+
+
8
Recognize a loss on sale of equipment
None
-
-
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