Question

Please, use the following info to answer the first two questions.

Tesla, Inc. is an American automaker, energy storage company, and solar panel manufacturer based in Palo Alto, California. Currently, the company produces two models of plug-in electric vehicles. – Model S (luxury sedan) and Model X (crossover SUV). Tesla's ultimate goal is to make eclectic vehicles affordable to everyone, this goal will be realized next year when it releases its newest vehicle, the Model 3. Model 3 has a base price of US$35,000, before any governmental rebates. It will be shipped to buyers in July 2017. The main Tesla’s automobile manufacturing plant is in Fremont, California. YES, Tesla Inc. mainly, produces in USA and after new giga-factory is complete, 95 percent of the parts contained in Tesla vehicles will be made in the United States (something to be proud of).

To help to finance the Model 3 production, Tesla issued common stock and convertible bonds in March 2017 to raise approximately $1.37 billion in cash. Tesla is also using some of the common stock and bond proceeds to grow its recently acquired solar business (SolarCity Inc.) and to supplement other parts of its business. From Tesla’s Inc. 10-Q (Quarterly fillings with SEC):

“In March 2017, we completed a public offering of our common stock and issued a total of 1,536,259 shares for total cash proceeds of $399.6 million (including 95,420 shares purchased by our Chief Executive Officer for approximately $25.0 million), net of underwriting discounts and offering costs.”

In March 2017, we issued $977.5 million in aggregate principal of 2.375% convertible senior notes due in March 2022 (“2022 Notes”) in a public offering. The net proceeds from the issuance, after deducting transaction costs, were $965.9 million.”

Common Stock par value: 0.001.

How was Tesla’s balance sheet impacted by the common stock issuance?

• A.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Notes payable

  +

  Common Stock

  +

  Additional Paid-in Capital

  +

  Retained earnings

  -

  =

  $399.6 million

  +

  =

  $399.6 million

  +

  +

  +

  -

  =

  $399.6 million

  FA

• B.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Notes payable

  +

  Common Stock

  +

  Additional Paid-in Capital

  +

  Retained earnings

  -

  =

  $399.6 million

  +

  =

  +

  $399.6 million

  +

  +

  $399.6 million

  OA

• C.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Notes payable

  +

  Common Stock

  +

  Additional Paid-in Capital

  +

  Retained earnings

  -

  =

  $399.6 million

  +

  =

  +

  +

  +

  $399.6 million

  $399.6 million

  -

  =

  $399.6 million

  $399.6 million

  FA

• D.

  Assets

  =

  Liabilities

  Stockholders' Equity

  Revenue

  -

  Expense

  =

  Net Income

  Statement of Cash flow

  Cash

  +

  Prepaid expenses

  =

  Notes payable

  +

  Common Stock

  +

  Additional Paid-in Capital

  +

  Retained earnings

  -

  =

  $399.6 million

  +

  =

  +

  $            1,535

  +

  $399.598million

  +

  -

  =

  $399.6 million

  FA

how was accounting equation impacted by the stock issuance?

• A. Assets increased, liabilities increased, equity increased.

• B. Assets increased, liabilities unaffected, equity increased.

• C. Assets increased, liabilities increased, equity unaffected.

• D. Assets decreased, liabilities unaffected, equity increased

Answer 1

SOLUTION:-

	Question 1:
	Assets		Liabilities	Shareholder's equity
	Cash	+	Prepaid Expenses	=	Notes payable	+	Additional paid in capital	+	Retained Earnings
b	$ 399.6						$ 399.6

When common stock is issued, then the following journal entry is passed:

Cash Dr

Common stock

This is due to the fact that an asset is increased cash, hence it would be debited and since, shareholders equity (Common stock) also increase, hence, it is credited.

Therefore, in the above Accounting equation, Cash under Assets and Additional paid in capital under Shareholders equity would be increased(+).

Hence, the correct answer is B.

Question 2:-

When common stock is issued, then the following journal entry is passed:

Cash Dr

Common stock

This is due to the fact that an asset is increased cash, hence it would be debited and since, shareholders equity (Common stock) also increase, hence, it is credited.

Therefore, in the above Accounting equation, Cash under Assets and Additional paid in capital under Shareholders equity would be increased(+).

The effect of the issue of the common stock would be:

Assets increased, liabilities unaffected, equity increased.

Hence, the correct answer is B.

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