Question

Cricket Corp. issued, without consideration, rights allowing stockholders to subscribe for additional shares at an amount greater than par value, but less than both market and book values.
When the rights are exercised, how are the following accounts affected?

a. Retained earnings
b. Additional paid-in capital

Answer 1

Answer:

a. Retained earnings

• not affected, retained earnings is affected only by net income/losses and dividend distributions.

b. Additional paid-in capital

• increased, since the new stocks will be sold above par value, additional paid-in capital will increase. This new issuance must be treated as any other issuance of stock.