Effect of Transactions: Issuance of Common Stock in Exchange for Cash

Analyzing the Effects of Transactions
Name
Institutional Affiliation
Analyzing the Effects of Transactions
Question One
Issuance of Common Stock in Exchange for Cash
Issuance of stock in exchange for cash is now a common practice in all corporations. Cash from the sale of common stock increases cash account which is a composition of current stock. Therefore, it increases assets because the company would be selling a piece of itself (Bodie, Kane & Marcus, 2014). However, the liabilities of the company are not affected in any way. On the other hand, stockholders’ equity will increase with the amount equivalent to the increase in assets. The total of shareholders equity and liabilities will give the total value of assets in a company. When a company sells common stock, what they do is to debit or increase common cash and credit or increase stockholders’ equity. When a sale of common stock has been sanctioned, entries similar to those in a cash account must be made in stockholders’ equity.
Question Two
Paid Monthly Rent
Rent is normally a liability on a company. Therefore, when one makes rent payments, they reduce the liability on them. However, since rent payments are made using company cash, they would lead to a reduction in company assets. When making double entries for rent transactions, one must credit liabilities and cash account, while debiting rent account (Francis & Smith, 2005). Shareholders’ equity is not affected in any way by rent payments. When rent payment is made and there were arrears in rent payable account, the amount paid will reduce that rent liability. When a company fails to make rent payments for a period, they will have to debit their rent payable account to increase the liabilities they have to contend with. Under the double entry system, when making rent payments, rental expenses are debited while rent payable is credited in the first entry. In the second entry rent payable is debited while crediting cash.
Question Three
Cash received from customers for a service performed
When services are offered to a customer, they pay cash for the services. This means that cash account will increase by the amount received from the customer. Cash account will have to be debited while the service revenue account will be credited because there will be a decrease in it. A customer is not given any credit for the provision of the service. Since no credit is given, there will be no change in the liabilities. However, to satisfy the accounting equation that holds that assets must be equal to liabilities added to shareholders equity, the equity will increase by the equivalent amount received from the customer. In any situation where a customer pays for services received immediately, the cash received will increase the assets and this will need to be balanced by increasing shareholders’ equity (Tiron&Mutiu, 2012). When the amount is credited in service revenue, it will increase the net income which will lead to an increase in retained earnings thereby increasing shareholders’ equity.
Question Four
Billed for services received
Customer billing involves sending them an invoice or a bill with the amount they are supposed to pay at a given date. When customers are billed for the services performed, one would want to increase assets because they are owed. The billed amount will lead to an increase in accounts receivable (Simkin, Norman& Rose, 2014). Billed transactions normally have a future settlement date and there is never a guarantee that the customers will honor these dates and that is why they are first recorded as accounts receivable. Equity will also be increased because the billed amount would need to be reflected in the revenues of the company. Therefore, assets will be debited to increase them and equity will also be credited to increase them. When the billed amount is settled, there will be a credit in accounts receivable and a credit in cash. However, there will be no change in the liabilities because the transaction does not affect the liabilities of the company.
Question Five
Paid dividends to Stockholders
A company can opt to pay dividends either in cash or through issuance of stock. When dividends are paid in cash, the company’s assets will decrease through a decrease in the cash account (Zhou&Ruland, 2006). The cash account of the company will be credited. The liabilities of the company will remain unaffected. The issu...