Listed below are various transactions that a company incurred during the current year. Select the impact on total stockholders’ equity for each scenario. Specifically state whether stockholders’ equity would increase (I), decrease (D), or have no effect (NE) as a result of each transaction listed below. Consider each transaction independently.
1. No par common stock is issued.
2. Treasury stock is sold at cost for cash (assume the cost method).
3. Treasury shares of preferred stock are purchased (assume the cost method).
4. A payment date occurs for a cash dividend.

Please refer to Explanation

Explanation:

1. No par common stock is issued. NO EFFECT (NE)

There is no effect because this neither increases nor does it reduce Equity.

2. Treasury stock is sold at cost for cash (assume the cost method). INCREASE (I).

This transaction increases equity as Treasury stock is being put into the market. Treasury stock is equity in the company that the company had repurchased.

3. Treasury shares of preferred stock are purchased (assume the cost method). DECREASE (I)

Buying Treasury whether Preferred or Ordinary reduces equity in the company as the company is essentially taking back ownership from owners.

4. A payment date occurs for a cash dividend. DECREASE (D)

Paying out dividends to shareholders has the effect of reducing equity.

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