I have an assignment that I am having trouble with and would like a little help. I have attempted to answer the question. If someone could verify my answer I would appreciate it.

The purpose of the question is to show the affect each of the following have on net profit, retained earnings, and stockholder's equity. (0 = no change, - = decrease, + = increase)

... Net Profit | Retained Earnings | Total Stockholder’s Equity
Stock Dividend declared & paid... 0... -... 0
Merchandise purchased on credit... 0... 0.. . -
Marketable Sec. sold above cost... +... +.. . +
A/R collected... 0.. . 0... 0
Cash Dividend declared and paid... 0... -... 0
Treasury Stock purchased at cost... -... -... -
Treasury Stock sold above cost... +... +.. . +
Common Stock sold... +... +.. . +
Fixed Asset sold below book... -... -... 0
Bond converted into stock... 0... +.. . +

I'll make some individual comments on ones that are incorrect. If I don't mention it, it's correct.


... Net Profit | Retained Earnings | Total Stockholder’s Equity
Merchandise purchased on credit... 0... 0.. . -

If you purchase merchandise, you're purchasing an asset. If you buy on credit, you owe. How does that affect equity? Different part of the equation.


Cash Dividend declared and paid... 0... -... 0

Any kind of dividend decreases retained earnings. With a stock dividend, you are distributing more shares of stock and therefore offsetting that decrease with an increase elsewhere in equity, so that total SE nets itself out. However, with a cash dividend, there isn't anything happening in the equity accounts other than retained earnings. (Cause it's paid with cash, an asset.) So if RE goes down, total SE has to go down too. You did this one the same as the stock dividend above, but they are different.


Common Stock sold... +... +.. . +

If you sell stock, you are bringing in cash (asset) and increasing the stock (equity). First, how does this affect net profit? Also, you must keep stock and retained earnings separated, so adding stock doesn't affect retained earnings. They are two separate things. The stock increase the total equity, but not the retained earnings portion of equity.


Bond converted into stock... 0... +.. . +

Conversions are an advanced topic, and not one I've ever worked with in real life, and haven't touched since class, so I'm not positive about this one. However, I don't see a way it would affect net profit (I don't see how a gain or loss would get involved there), the bond disappearing would be a liability, it would increase the stock so it increases equity. But I don't know how this would be affecting retained earnings. You'd have to tell me why you think this and I'd have to look it up. (Better yet, someone who knows conversions answer this. ;))

Now, I saved the two treasury stock ones for last because they are both 2/3 incorrect and I think you have a misunderstanding about treasury stock. It's a weird topic for most people when they first learn it.

First of all, the only things that affect net profit are revenues and expenses (and gains and losses, which are different if you want to get technical). Buying and selling stock and such things doesn't affect the profits in any way. Selling shares for higher than cost is NOT a gain. It creates additional paid-in capital. Therefore, treasury stock transactions won't affect net profit.

Second, there's only one circumstance where treasury stock will affect retained earnings.

If you sell it at cost, it comes back out of the treasury stock account at the same amount it went in for, which was cost. If you sell it for higher than cost, it still comes out of treasury stock at cost, but then you have this extra amount - which goes into an account like Paid-In Capital from Sale of Treasury Stock. This is a paid-in capital (or contributed capital) account. It's not a gain. It doesn't affect retained earnings. You just have more paid-in capital.

If you subsequently sell treasury stock at below cost, that difference from cost can come back out of the Paid-in Capital from Sale of Treasury Stock account, if there's something in it, up to the limit of what's in it. Still doesn't affect retained earnings.

If, however, you sell at below cost, and there isn't anything in the PIC account, or it's higher than what's in there, then the difference must come out of retained earnings. That is the only circumstance when it will affect retained earnings. You have one at cost, and one above cost. That doesn't fit this circumstance.

The effect on total SE for both transactions is the only correct part.

Study the treasury stock stuff a bit more. As I said, usually confusing for someone first learning it.