Question

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity.

1. Recorded accrued interest earned on a note receivable.
2. Declared a cash dividend.
3. Declared and distributed a stock split.
4. Approved a retained earnings restriction.
5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
6. Paid the cash dividend declared in item 2 above.
7. Recorded accrued interest expense on a note payable.
8. Declared a stock dividend.
9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item	Asset	Liabilities	Stockholders’ Equity	Paid-in Capital	Retained Earnings	Net Income

Short answer

The revenue and gain led to increased owners’ equity, while losses and expenses will decrease shareholder equity.

Step-by-step solution

Meaning of Stockholders Equity

Stockholders Equity is the financial resources owned by a company (excluding debt). They consist of the initial share capital, legal and statutory reserves (previous undistributed profits), and retained earnings (previous undistributed and unused profits).

Indicating the effect of each transaction

Item	Asset	Liabilities	Stockholders’ Equity	Paid-in Capital	Retained Earnings	Net Income
1	I	NE	I	NE	I	I
2	NE	I	D	NE	D	NE
3	NE	NE	NE	NE	NE	NE
4	NE	NE	NE	NE	NE	NE
5	D	NE	D	NE	D	D
6	D	D	NE	NE	NE	NE
7	NE	I	D	NE	D	D
8	NE	NE	NE	I	D	NE
9	NE	NE	NE	NE	NE	NE