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For each transaction, indicate the transaction's effect on the company's accounting equation by selecting either increase, decrease, or no effect for each area of the accounting equation. Do not leave any of the fields below blank. (If the transaction were to cause an increase and decrease to the same area of the accounting equation, """"no effect"""" should be chosen as the overall effect to that area) On May 1, issued 20,000 shares of $10 par common stock for $20 per share. On June 1, purchased 4,000 shares of treasury stock for $25 per share. On Sept 1, declared a 4-for-1 stock split. On Oct 1, declared a dividend of $10,000 to be paid on Nov 15. On Nov 15, paid the dividend previously declared on Oct 1.

Answer :

Answer:

Accounting equation and the effects of transactions are given below:

[tex]Assets = Liabilities + Stockholders' Equity[/tex]

May-01 :    Assets⇒ Increase ,   Stockholders' Equity⇒ Increase

Jun-01 :     Assets⇒ No Effect

Sep-01 :    Stockholders' Equity⇒ No Effect

Oct-01 :     Liabilities⇒ Increase,   Stockholders' Equity⇒ Decrease

Nov-15 :    Assets⇒ Decrease,   Liabilities⇒ Decrease

Explanation:

May-01:  Issuing common stocks increases Asset(cash) and Equity(common stock) by $400,000(20,000×20).

Jun-01:  Purchasing shares of treasury stock decreases Asset(cash) and at the same time increases Asset(investments) by $100,000. Thus net effect is zero.

Sep-01: Stock split is corporate action in which total outstanding shares are increased and the price of those shares is proportionally decreased to increase the liquidity of shares in the market. The outstanding no. of  shares increases and the par value of shares decreases. Hence, there's no effect of these actions on the accounting equation. A memorandum entry, a short message, is entered in the general journal which does not contain any balance.

A 4-for-1 split means that every outstanding share will be increased by four times and the par value will be reduced by the same amount.

Oct-01: Declaring dividend creates liability for the company. So, when company declare dividend, its Liability( Dividend Payable) increases and Equity(Dividend) decreases.

Nov-15: Paying dividend already declared decreases Liability( Dividend Payable) and decreases Asset(Cash)

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