Brumfield, Inc. issued 7,000 shares of $1 par common stock for $20 per share. In addition to the increase in cash, what effect does this transaction have on Brumfield's accounting equation?

Question

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When Brumfield issues 7,000 shares of $1 par common stock for $20 per share, it receives $140,000 in cash ($20/share x 7,000 shares). The accounting equation is:
Assets = Liabilities + Equity
The issuance of common stock increases equity, specifically the common stock account, by the par value of the shares issued, which is $7,000 ($1 par value x 7,000 shares). The remaining $133,000 ($140,000 cash received - $7,000 par value) is recorded as additional paid-in capital in excess of par value. Therefore, choice B is the correct answer: Common stock increases $7,000 and additional paid-in capital in excess of par increases $133,000.