EverBlue Company issued 30,000 shares of common stock in 2018. The par value of the common...

EverBlue Company issued 30,000 shares of common stock in 2018. The par value of the common stock is $1 per share. The selling price is $20 per share. Which of the following is true?

Group of answer choices

Stockholders’ equity increases by $600,000.

Stockholders’ equity increases by $30,000.

Stockholders’ equity decreases by $30,000.

Stockholders’ equity decreases by $600,000.

Solutions

Expert Solution

Ans: The correct option is Stockholder's Equity increases by $600000.

Explanation-

The two components of Stockhoder's Equity are (1) Capital Invested in the business and (2) Company's earnings (Cumulative earnings). This means if the company's capital increases (by issuing common stock) or earnings increases, it will lead to the increase in Stockholder's equity or vice versa.

Retained earnings and treasury stock are found in the balance sheet under the head Stockholder's Equity.

Increase in Stockholder's Equity from capital - When the company issues Common stock or preferred stock i.e preference shares then the equity shown in the balance sheet increases by the issue price of the stock. And is the stock is sold at a premium i.e., above par value, then the par value of the stock is shown as capital and the excess above par value will be credited to premium account under Equity in a separate line.

Here, EverBlue Company issued 30,000 shares of common stock in 2018. The par value of the common stock is $1 per share. The selling price is $20 per share. the issue price is $20 per shares. Therefore, Stockholder's Equity will increase by $600000 (30000 x $20) and the amount to be shown under capital will be $30000 (30000 x $1) and the amount shown under premium account in a separatle line will be $570000 {30000 x ($20-$1)}

Hence, the Stockholder's Equity increases by $600000 (by issue price)

ekkarill92 answered 1 year ago

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