[Bonk]

In Year 1, Rona Corp. issued 5,000 shares of $10 par value common stock for $100 per share. In Year 7, Rona reacquired 2,000 shares at $150 per share from the estate of one of its deceased officers and immediately canceled these 2,000 shares. Rona uses the cost method in accounting for its treasury stock transactions. In connection with the retirement of these 2,000 shares, Rona should debit

A. APIC $20,000; R/E $280,000

B. APIC $100,000; R/E $180,000

C. APIC $280,000; R/E $0

D. APIC $180,000; R/E $100,000

Answer (D) is correct.

The 2,000 shares of stock were originally issued for $100 per share, a total of $200,000. Of this amount, $20,000 (2,000 shares × $10 par) should have been credited to common stock, with the remaining $180,000 [2,000 shares × ($100 – $10)] credited to additional paid-in capital. When these 2,000 shares are purchased at $150 per share and retired, common stock and additional paid-in capital should be debited for $20,000 and $180,000, respectively, which were the amounts related to the reacquired shares originally credited to those accounts. Moreover, $100,000 [2,000 shares × ($150 – $100)] should be debited to retained earnings (assuming no previous treasury stock transactions that resulted in additional paid-in capital). Because the stock was immediately retired, this journal entry would be made whether the treasury stock is accounted for under the cost method or the par value method.

— Why is the answer not C? It says that 5,000 $10 par shares were issued for $100. Wouldn’t that make APIC $450,000, which would be enough to cover the $280,000 debit when the shares are retired?

FAR: 85
BEC: 84
AUD: 74, 83
REG: ??