When a Corporation Engages in a Capital Transaction (Those Relating

When a corporation engages in a capital transaction (those relating to its contributed capital), the journal entry may involve either a debit or a credit to contributed surplus. While not permitted by accounting standards, if these debits or credits were to be recognized through income, a debit would be called a "loss" and a credit would be called a "gain."
Consider the following sequence of transactions:
• Jan. 1, 2019: Company issues 1,500,000 no par common shares at $14 each.
• Jan. 1, 2021: Company reacquires 150,000 common shares in the open market at $9 each, and cancels them immediately.
There were no other capital transactions and the company had not paid any dividends.
Required:
a. Prepare the journal entries for the two transactions.
b. Review the journal entry for January 1, 2021. How much was credited other than cash? Does this credit reflect good or bad management? As a shareholder, would you be happy or unhappy about this credit entry?
c. What would have been the journal entry for January 1, 2021 had the repurchase price been $24?
d. In the journal entry for part (c), explain why the debit goes to reduce retained earnings. How would a shareholder interpret the reduction in retained earnings?

Correct Answer:

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d. The debit is charged against retaine...

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