Liabilities and equity
The Equity Effect
Every equity transaction has a fixed net effect: splits move nothing, small stock dividends move fair value within equity, and treasury stock is contra-equity.
How the exam words it
- -The stem lists transactions and asks 'what is the net effect on total stockholders' equity?'.
- -A stock dividend is declared and it asks 'by how much do retained earnings fall?'.
- -Treasury shares are bought and reissued and it asks for 'the credit to APIC-Treasury Stock on the reissuance'.
- -A split is declared and it asks for the new par value and whether total equity changed.
The playbook
- 1Ask two questions in order: does total equity change, and which accounts move within it.
- 2Issuances raise equity; buybacks and cash dividend declarations lower it; stock dividends and splits only reshuffle or restate within equity.
- 3Small stock dividends (under 20 to 25 percent) capitalize fair value; large ones capitalize par; splits change par and shares with no journal entry.
- 4Treasury stock at cost: reissue above cost credits APIC-TS; below cost debits APIC-TS first, then retained earnings, and never touches income.
The trap
Treating treasury stock as an asset or its reissuance as income. Treasury stock is contra-equity, and no gain or loss ever runs through the income statement.
How the exam varies it
The same pattern, re-skinned along these axes:
Total equity effect versus movement between equity accountsCash dividend versus small or large stock dividend versus splitTreasury purchase versus reissue above or below cost
Drill this pattern
8 questions of The Equity Effect from across the AUD topics. Clear it by getting 5 right with a streak of 3.