Question

List and explain four entries that affect the Statement of Stockholder’s Equity.

Answer 1

Answer:

Following are the four transactions that affect the statement of Stockholder's Equity:

(i) Declaration of cash diivdend:

When dividend is declared, it become a liability and retained earning is decreased. In this case since retained earning is part of stock holder's equity, it affect stock holder's equity.

Following is the journal entries:

Retained earnings	XXX
Dividend payable		XXX
(when dividend is declared)
Dividend payable	XXX
Cash		XXX
(when dividend is paid)

(ii) Issue of additional Stock to Investors:

  This transaction would increase cash as well as invested capital. Hence both assets and shareholder's equity will be increased.

Following is the journal entries:

Cash	XXX
Common stock		XXX
(issue of common stock)

(iii) Recognition of Periodic Net Income or Loss:

If the firm earn net income, it will increase retained earning and so shareholder's equity. Similarly, if firm incur losses, it will decrease retained earning and so shareholder's equity.

Following is the journal entries:

Income summary	XXX
Retained earnings		XXX
(to recognize net income)
Retained earnings	XXX
Income summary		XXX
(to recognize net loss)

(iv) Treasury stock:

  Firms sometimes repurchase their own outstanding shares. Such repurchased shares are termed treasury stock and are no longer outstanding. The acquisition of treasury stock reduces both cash and shareholders’ equity. It is just the opposite of issue of stock.

Following is the journal entries:

Treasury Stock	XXX
Cash		XXX
(treasury stock purchased)