Question

Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s) should be debited?

a.The share account for the total cost.
b.The share account for the original issue price and contributed surplus for the additional amount.
c.The share account for the average per share amount and retained earnings for the additional amount.
d.The share account for the average per share amount and a loss account for the additional amount.

Answer 1

When a corporation reacquires shares above their original issue price without any contributed surplus, it should debit the share account for the original issue price and the retained earnings for the excess amount, reflecting the economic loss from the share reacquisition.

Step-by-step explanation:

When a corporation reacquires shares at a cost greater than their original issue price and cancels them, the correct accounting transaction is to debit the share account for the original issue price and the retained earnings for the additional amount. As you mentioned there is no contributed surplus booked, the excess amount over the original issue price should be considered a reduction of retained earnings, which represents the earnings that were not distributed to shareholders and were kept by the company for future investment or as a cushion against future losses.

The correct entry, according to your question, would be option 'd': The share account for the average per share amount (usually the par value) and a loss account (or more precisely, retained earnings) for the additional amount. This reflects that the corporation suffered an economic loss by paying more to reacquire the shares than it received when it originally issued them.