Question

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 September 1, 2020, would include the following:

	A.	No net change to stockholders’ equity.
	B.	A decrease to retained earnings for $5,000.
	C.	A decrease to assets for $45,000.
	D.	No net change to preferred stock outstanding.

Answer 1

Number of preferred shares redeemed = 1,000

Redemption price per share = $45

Cash paid to redeem preferred share = Number of preferred shares redeemed x Redemption price per share

= 1,000 x 45

= $45,000

Thus, total assets will decrease in the form of cash by $45,000.

Correct option is C.

Due to redemption of 1,000 preferred shares, preferred stock outstanding and stockholders equity will decrease.

Preferred stock and additional paid in capital in excess of par- preferred will be debited but retained earnings would not be effected.

Kindly comment if you need further assistance.

Thanks‼!