| Course | ACC-6040 Fundamentals of Accounting I |
|---|---|
| Module | Module 7 |
| Paper type | Written Assignment 7: reporting and interpreting stockholders' equity |
| Length | About 782 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Science in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6040 Module 7
Bringing in an Investor and Buying Out a Founder: A Year of Equity Transactions at Garden State Ice Rinks
Student Name
Master of Science in Accounting, Thomas Edison State University
ACC-6040: Fundamentals of Accounting I
Mentor Name
Month Day, Year
Bringing in an Investor and Buying Out a Founder: A Year of Equity Transactions at Garden State Ice Rinks
Introduction
Stockholders' equity represents the owners' claim on the company's assets: the capital they contributed and the earnings the company has kept. Libby et al. (2017) keep what owners paid in apart from what the business has earned and kept, and show treasury shares separately again, since each line says something different about how the company is funded.
Equity at the Start of 2027
Garden State's founders bought 100,000 shares of $1 par common stock for $600,000 in 2026. Equity opened 2027 at $756,000: $100,000 of common stock at par, $500,000 paid in above par and $156,000 of retained earnings.
The common stock account holds only the $1 par per share; whatever the founders paid beyond par sits in a separate paid-in capital account. Par value has little economic meaning today; it survives mainly as a legal minimum and a bookkeeping convention, which is why many companies choose a very low par or no par at all.
The 2027 Transactions
Shares bought back are carried at cost as a deduction from equity, not as an asset, since a company cannot hold a claim on itself. The $2 a share over cost on the reissue is credited to paid-in capital; a company cannot earn income dealing in its own shares. Dividends are paid only on outstanding shares, which exclude the 6,000 still held in treasury.
A cash dividend creates a liability on the declaration date, the record date decides who receives it and payment removes the liability. A stock dividend would instead move amounts from retained earnings to paid-in capital without using cash, and a stock split would change only the number of shares and their par value.
| Date | Transaction | Entry |
|---|---|---|
| April 1 | Sold 50,000 shares to a regional sports investor at $12 | Dr Cash 600,000; Cr Common Stock 50,000; Cr Paid-in Capital in Excess of Par 550,000 |
| August 1 | Bought 10,000 shares from a departing founder at $13 | Dr Treasury Stock 130,000; Cr Cash 130,000 |
| November 1 | Reissued 4,000 treasury shares to the rink manager at $15 | Dr Cash 60,000; Cr Treasury Stock 52,000; Cr Paid-in Capital, Treasury Stock 8,000 |
| December 15 | Declared and paid a cash dividend of $0.40 on 144,000 outstanding shares | Dr Retained Earnings 57,600; Cr Cash 57,600 |
The Equity Section at December 31, 2027
Net income for 2027 was $267,844.
| Stockholders' equity | Amount |
|---|---|
| Common stock, $1 par, 150,000 shares issued, 144,000 outstanding | $150,000 |
| Additional paid-in capital | 1,050,000 |
| Paid-in capital, treasury stock | 8,000 |
| Retained earnings: $156,000 + $267,844 minus $57,600 | 366,244 |
| Deduct shares held in treasury, 6,000 at $13 | (78,000) |
| Total stockholders' equity | $1,496,244 |
Earnings Per Share and Return on Equity
Earnings per share is $267,844 / 134,000, or $2.00. Average equity is ($756,000 + $1,496,244) / 2 = $1,126,122, so return on equity is 23.8 percent, flattered in part by the bonds, which fund much of the rinks without adding to equity.
The 23.8 percent return is high partly because average equity was low before the outside investor's purchase raised it. Had the investor received preferred shares instead, preferred dividends would be subtracted from net income before computing earnings per share for common shareholders, and the preferred holders would be paid before common shareholders in any liquidation. Nissim and Penman (2001) show how return on equity can be broken into operating and financing parts, which separates how well the rinks are run from how they are funded.
| Weighted-average shares | Shares | Months outstanding | Weighted |
|---|---|---|---|
| Outstanding January 1 | 100,000 | 12/12 | 100,000 |
| Issued April 1 | 50,000 | 9/12 | 37,500 |
| Treasury purchase August 1 | (10,000) | 5/12 | (4,167) |
| Reissued November 1 | 4,000 | 2/12 | 667 |
| Weighted average | | | 134,000 |
Alternatives the Board Considered
Instead of buying the founder's shares, the board could have let the outside investor buy them directly, avoiding the use of company cash. Instead of a cash dividend, it could have declared a 10 percent stock dividend, moving retained earnings into contributed capital without any cash leaving the company, or a two-for-one split, which doubles the shares and halves the par value with no entry at all. Neither changes total equity or each owner's percentage. Grullon and Michaely (2002) found that U.S. companies increasingly used share repurchases rather than dividends to return cash to shareholders, partly because repurchases are more flexible, which is one reason growing private companies like Garden State often pay small dividends and handle owner exits through buybacks.
Each choice also sends a signal. Buying back shares can tell investors that management thinks the stock is undervalued, while a first dividend suggests confidence in steady cash flow; boards weigh those messages along with the effect on cash and debt covenants.
References
Grullon, G., & Michaely, R. (2002). Dividends, share repurchases, and the substitution hypothesis. The Journal of Finance, 57(4), 1649-1684. https://doi.org/10.1111/1540-6261.00474
Libby, R., Libby, P. A., & Hodge, F. (2017). Financial accounting (9th ed.). McGraw-Hill Education.
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6(1), 109-154. https://doi.org/10.1023/A:1011338221623
ACC 6040 Module 7 instructions, in plain terms
Stockholders' equity is the subject of Written Assignment 7, the last written set in ACC-6040. Expect problems on issuing common and preferred stock, treasury stock purchases and reissues, cash and stock dividends, stock splits, the statement of stockholders' equity, earnings per share and return on equity, sometimes with dividend preferences on preferred stock. The balances here are not from any real filing; they continue the invented rink operator, so its beginning equity and net income agree with the earlier assignments. Expect earnings per share in most versions. Prompts generally include a share issue, a buyback, a reissue, dividends and the earnings per share and return on equity that follow.
Inside the ACC 6040 Module 7 example
The introduction explains the parts of equity and why they are separated. The starting balances are stated, then four transactions are recorded in a dated table, with explanations of treasury stock and dividend rules. The equity section is presented in standard form with the retained earnings computation shown. Weighted-average shares are built in a table, followed by earnings per share and return on equity with a note on what drives the return. A final section compares the chosen transactions with alternatives, a stock dividend, a split and a direct sale, and adds research on the shift from dividends to repurchases. The earnings per share computation uses the weighted average shares outstanding for the year. Each equity transaction is recorded and then summarized in the statement of stockholders' equity, with earnings per share computed last.
Reading the ACC 6040 Module 7 grading rubric
Equity transactions complete the group of five worth 25 percent of the grade. On equity problems, mentors check that share issues are split between par and paid-in capital, that treasury stock is recorded at cost and reissue differences go to paid-in capital, that dividends are computed on outstanding shares, that the equity section totals correctly and that weighted-average shares, earnings per share and return on equity are computed accurately. Explaining how stock dividends and splits differ from cash dividends demonstrates understanding beyond the entries. Equity statements that reconcile each class from opening to closing balance show the transactions clearly.
ACC 6040 Module 7 help: mistakes that cost marks
The repeat offenders are treasury stock shown as an asset, reissue gains sent to income and dividends figured on issued instead of outstanding shares. Weight each block of shares by the months it was out, and restate earlier periods for any split or stock dividend. Use average equity for return on equity. Check that ending retained earnings equals beginning plus net income minus dividends. Keep treasury shares in equity as a deduction and send any excess on reissue to paid-in capital. Record each share transaction at its actual price. A free first sample of your own ACC-6040 Module 7 problems is available on request.
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ACC 6040 Module 7 questions, answered
Where can I find a free ACC 6040 Module 7 sample paper?
The rink's equity assignment is printed above: a share issue, a treasury purchase and reissue, a cash dividend, the equity section, weighted shares, EPS and return on equity.
Is treasury stock an asset?
No. Treasury stock is the company's own shares bought back, recorded at cost as a reduction of stockholders' equity.
How is a gain on reissuing treasury stock recorded?
As paid-in capital, never as income, because a company cannot earn profit by trading its own shares.
How do stock dividends and splits differ from cash dividends?
They distribute additional shares without any cash leaving the company, so total equity and each owner's percentage are unchanged.
How is return on equity calculated?
Net income divided by average stockholders' equity for the period.