Question

During 2020, Red Dragon Corporation had the following transactions and events: 1. Issued par value preferred stock for cash at par value. 2. Issued par value common stock for cash at an amount greater than par value. 3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock. 4. Declared a small stock dividend when the market value was higher than the par value. 5. Declared a cash dividend. 6. Made a prior period adjustment for understatement of net income. 7. Issued par value common stock for cash at par value. 8. Paid the cash dividend. 9. Issued the shares of common stock required by the stock dividend declaration in 4. above. Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders' equity.

Answer 1

Answer:

Statement    Capital Stock     Additional Paid-in-Capital     Retained Earnings

1                     Increase            No effect                              No effect

2                     Increase            Increase                               No effect

3                     No effect           No effect                               No effect

4                     Increase           Increase                                Decrease

5                     No effect            No Effect                             Decrease

6                     No effect            No effect                              Increase

7                     Increase             No effect                             No effect

8                      No effect            No effect                             No effect

9                      No effect            No effect                             No effect

Explanation:

Note:

Shares issued at par value only increase the capital stock and does not affect the additional paid in capital and the retained earnings.

Shares issued for value more than its par value will increase the additional paid in capital also.

Split off only changes the number of shares as there is no change in overall value, therefore, no effect on any part of equity.

Stock dividend is also capitalization of retained earnings, it decreases retained earnings, and increases capital stock.

Cash dividend only decreases the retained earnings.

Also when dividends are declared then only it is recorded, the date when it is issued does not matter.

Net income if understated would represent a less net income then what it should be, so when it is corrected it will increase and so does the retained earnings increase.