Question

Mary issues common stock in exchange for legal services received. The common stock has a fair value of $3,000 and a par value of $500.

By what amount did this transaction affect Mary’s total shareholder equity? (ignore taxes)

By what amount did this transaction affect Mary’s net income for the year? (ignore taxes)

PLEASE SHOW WORK

Answer 1

Effect on Stockholders Equity:

Common Stock will increase by $500 and Paid-in Capital in excess of par will increase by $2,500. As net income decrease by $3,000, the Retained Earnings will decrease by $3,000 , hence total stockholders equity will have no effect.

Paid-in Capital in Excess of Par = Fair value - par value

= $3,000 - $500

= $2,500

Effect on Net Income:

Legal Expenses will increase by $3,000. Hence, Net Income will decrease by $3,000.