Please, someone, explain the journal entry of the retirement of the stock.
Park Corp.’s equity accounts at December 31, Year 4, were as follows:
Common stock, $20 par $8,000,000
Additional paid-in capital 2,550,000
Retained earnings 1,275,000
All shares of common stock outstanding at December 31, Year 4, were issued in Year 1 for $26 a share. On January 4, Year 5, Park reacquired 20,000 shares of its common stock at $24 a share and retired them. Immediately after the shares were retired, the balance in additional paid-in capital was
A. $2,590,000
B. $2,510,000
C. $2,430,000
D. $2,470,000
Answer (D) is correct.
The 20,000 shares of common stock that were reacquired and retired were originally issued for $520,000 (20,000 shares × $26). Of this amount, $400,000 (20,000 shares × $20 par) should have been credited to common stock, with the remaining $120,000 ($520,000 – $400,000) credited to additional paid-in capital. The 20,000 shares were reacquired for $480,000 (20,000 shares × $24). To record the purchase and retirement, $400,000 should be debited to the common stock account, with the remaining $80,000 ($480,000 – $400,000) debited to additional paid-in capital. Thus, the additional paid-in capital following the retirement of the shares should be $2,470,000 ($2,550,000 – $80,000).
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