When a Corporation Engages in a Capital Transaction (Those Relating

question 71

Essay

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.1,2007: Company issues 1,500,000 no par common shares at $14 each.
• Jan.1,2013: 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 1,2013.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 1,2013 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?

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Definitions:

Fluctuation

Variability or changes in a state, condition, or level, often seen in contexts like economics or physical measurements.

Need for Order

The intrinsic human desire for organization, structure, and predictability in one's environment and life.

Hierarchy

A system or organization in which people or groups are ranked one above the other according to status or authority.

Need for Achievement

A psychological drive that motivates individuals to accomplish goals and excel in their endeavors.