Question

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On January 1, 2020, Castaway Corp. issued 5,000 shares of preferred stock ($15 par value) at...

On January 1, 2020, Castaway Corp. issued 5,000 shares of preferred stock ($15 par value) at $45 per share. Each share of preferred stock is redeemable at the option of the stockholder at $45 per share. On September 1, 2020, preferred shareholders holding 1,000 shares of preferred stock redeemed their stock.

The entry recorded by Castaway Corp. on January 1, 2020, would not include the following:

	A.	Credit to preferred stock at par value.
	B.	Credit to additional paid-in capital for the excess of the issuance price over the par value.
	C.	Debit to cash for the issuance price.
	D.	Credit to a liability for the redemption feature.

Expert Solution

On January 1, 2020, Castaway Corp. issued 5,000 shares of preferred stock ($15 par value) at $45 per share.

The following journal entry will be made to record the given transaction:

General Journal	Debit	Credit
Cash	$225,000
Preferred stock		$75,000
Additional paid in capital in excess of par- preferred		$150,000

Par value of per share = $15

Issue price per share = $45

Number of shares issued = 5,000

Debit to cash = Number of shares issued x Issue price per share

= 5,000 x 45

= $225,000

Credit to preferred stock = Number of shares issued x Par value of per share

= 5,000 x 15

= $75,000

Credit to additional paid in capital in excess of par - preferred = Number of shares issued x (Issue price per share - Par value of per share )

= 5,000 x (45-15)

= 5,000 x 30

= $150,000

Hence, The entry recorded by Castaway Corp. on January 1, 2020, would not include the Credit to a liability for the redemption feature.

Correct option is D.

ekkarill92 answered 2 years ago

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