B is corrent because under the par method, the acquisition cost of treasury shares is compared with the amount received at the time of their original issue. The amount originally received in excess of the par value is first charged to additional paid-in capital relating to the original issue, and the remainder to retained earnings. The journal entry would be| Treasury stock (2,000 × $20) | 40,000 | | Additional paid-in capital (2,000 × $5) | 10,000 | | Retained earnings (forced) | 10,000 | | Cash (2,000 × $30) | 60,000 |
A is incorrect. because retained earnings also decreases as the result of this transaction. Refer to the correct answer explanation.C is incorrect. Under the par method, the acquisition cost of treasury shares is compared with the amount received at the time of their original issue. The amount originally received in excess of the par value is first charged to additional paid-in capital relating to the original issue, and the remainder to retained earnings. The journal entry would be| Treasury stock (2,000 × $20) | 40,000 | | Additional paid-in capital (2,000 × $5) | 10,000 | | Retained earnings (forced) | 10,000 | | Cash (2,000 × $30) | 60,000 |
D is incorrect Under the par method, the acquisition cost of treasury shares is compared with the amount received at the time of their original issue. The amount originally received in excess of the par value is first charged to additional paid-in capital relating to the original issue, and the remainder to retained earnings. The journal entry would be| Treasury stock (2,000 × $20) | 40,000 | | Additional paid-in capital (2,000 × $5) | 10,000 | | Retained earnings (forced) | 10,000 | | Cash (2,000 × $30) | 60,000 |
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