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 stockholdersâ 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

Answer: C. A decrease to assets for $45,000.

Explanation:

When shareholders redeem their stock, the company pays them for the redeemed stock at a certain price which in this case is $45.

The total cost of redemption is therefore:

= 45 * 1,000

= $45,000

The company uses cash to pay for this which is an asset. Assets will therefore reduce by $45,000 which is the amount of cash paid.