PQR Inc.had 1,000 common shares outstanding with a par value of $10 per share.There was $20,000 of contributed surplus arising from previous retirements of shares in this class.Assume that half of these shares were retired for $14 per share.The journal entry to record this transaction would include:

Question

Quizplus · Accepted Answer

When half of the shares are retired for $14 per share, the cash received would be $7,000 (500 shares x $14 per share). The par value of the shares retired is also $5,000 (500 shares x $10 per share). Therefore, the excess of cash received over the par value is $2,000 (500 shares x ($14 - $10)). This excess is allocated to the contributed surplus account.

The journal entry to record this transaction would include:

Debit: Cash $7,000 
Debit: Retained Earnings $20,000 ($10 par value x 500 shares) 
Debit: Contributed Surplus $2,000 ($4 excess per share x 500 shares) 
Credit: Common Shares $15,000 ($10 par value x 500 shares plus $5 premium per share x 500 shares)

Therefore, the correct answer is D, a debit to retained earnings of $20,000 and a debit to contributed surplus of $20,000.

PQR Inchad 1,000 Common Shares Outstanding with a Par Value of of $10