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How do I record equity transaction?

Recording equity transactions is probably the hardest part in Introductory Accounting. Here is a series of four questions to give you practice at this and the solutions walk you through each part in detail, give you the journal entry and tell you WHY that's the answer. Give these a try:

1. What is the effect of issuing 1,000 shares of preferred stock at $62 per share?
Assets Liabilities Equity
a. no effect no effect no effect
b. decrease no effect decrease
c. increase no effect increase
d. increase no effect no effect

2. What is the effect of repurchasing 500 shares of preferred stock at $49 per share?
Assets Liabilities Equity
a. increase increase increase
b. decrease no effect decrease
c. increase no effect increase
d. increase no effect no effect

3. What is the effect declaring and paying a cash dividend?
Assets Liabilities Equity
a. no effect no effect no effect
b. decrease no effect decrease
c. increase no effect increase
d. decrease no effect no effect

4. What is the effect of issuing a small stock dividend when shares are trading at $40 and the par value is $1.00?
Assets Liabilities Equity
a. no effect no effect no effect
b. no effect no effect decrease
c. increase no effect increase
d. increase no effect no effect

Solution Preview

1. What is the effect of issuing 1,000 shares of preferred stock at $62 per share?

You get cash and have new contributed capital. Here is the entry:

Debit: Cash 1000 x $62 (= Asset so that went up)
Credit: Stock 1000 x par value (not given) ( = equity so that went up)
Credit: Paid in capital in excess of par 1000 x [$62 minus par value] ( = equity so that went up)

Answer: assets and equity went up, no effect on liabilities.

2. What is the effect of repurchasing 500 shares of preferred stock at $49 per share?

You give ...

Solution Summary

Recording equity transactions is probably the hardest part in Introductory Accounting. Here is a series of four questions to give you practice at this and the solutions walk you through each part in detail, give you the journal entry and tell you WHY that's the answer.

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