Question

Brumfield issued 8 000 ordinary shares for $28 per share.

In addition to the increase in cash, what effect does this transaction have on Brumfield's accounting equation?

		Ordinary shares increases $224 000
		Ordinary shares decreases $224 000 and contributed capital increases $224 000
		Ordinary shares increases $8 000 and retained earnings increases $168 000
		Ordinary shares increases $175 000 and the gain on share issuance increases $175 000

Answer 1

Ordinary share will increase $224,000

The reason being journal entry is Cash account debited for $224,000 and Ordinary share capital is credited to $224,000. It is assumed $28 is the par of the ordinary share hence entire cash received is credited to Ordinary share capital account. Issue of shares does not affect Retained earnings account balance. The contributed capital balance is same as issued capital account. Hence answer is a) Ordinary share capital will increase $224,000