Assume common stock is issued to employees as a result of exercising stock purchase rights issued under a noncompensatory share purchase plan. Which of the following accurately describes the effect on the company's income, paid-in capital, and retained earnings, respectively?
A) decreased, increased, and decreased
B) no effect, increased, and increased
C) decreased, increased, and no effect
D) no effect, increased, and no effect

Question

Quizplus · Accepted Answer

When common stock is issued to employees under a noncompensatory share purchase plan, it does not affect the company's income statement, so there is no effect on income. The transaction increases paid-in capital because the company is receiving cash (or other consideration) in exchange for issuing stock. There is no effect on retained earnings because this transaction does not involve the distribution of profits or the recording of any expenses.

Assume Common Stock Is Issued to Employees as a Result