Which of the following journal entries results in a decrease in both total assets and stockholders' equity?

• A. Issuing common stock for cash
• B. Borrowing cash from a bank
• C. Purchasing equipment with cash
• D. Recording payment of cash dividends to shareholders

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the impact of paying cash dividends to shareholders. When a company pays cash dividends, it reduces its cash balance, which is an asset, and simultaneously decreases retained earnings, which is a component of stockholders' equity.
2. Step 2: Recall the accounting equation: Assets = Liabilities + Stockholders' Equity. Any transaction that decreases assets without affecting liabilities will also decrease stockholders' equity to maintain the balance.
3. Step 3: Analyze the journal entry for paying cash dividends. The entry typically involves debiting 'Dividends' (or 'Retained Earnings') to reduce stockholders' equity and crediting 'Cash' to reduce total assets.
4. Step 4: Compare this transaction to the other options provided. Issuing common stock for cash increases both assets and stockholders' equity. Borrowing cash from a bank increases assets and liabilities. Purchasing equipment with cash decreases one asset (cash) but increases another asset (equipment), leaving total assets unchanged.
5. Step 5: Conclude that the correct journal entry resulting in a decrease in both total assets and stockholders' equity is the payment of cash dividends to shareholders.