Gupta Corp. purchased its own shares on January 1, 2020 for $ 20,000 and debited Treasury Shares for the purchase price. The shares were subsequently sold for $ 12,000. The $ 8,000 difference between the cost and sales price should be recorded as a debit to
A) Contributed Surplus to the extent that previous net "gains" from sales or retirements of the same class of shares are included therein; otherwise, to retained earnings.
B) Contributed Surplus regardless of whether there have been previous net "gains" from sales or retirements of the same class of shares included therein.
C) Retained Earnings.
D) Loss from Sale of Treasury Shares.

Question

Quizplus · Accepted Answer

CWhen a company sells its treasury shares for less than their cost, the loss (the $8,000 difference in this case) is typically handled in two ways, depending on the accounting policies and the legal requirements applicable in the jurisdiction. Firstly, if there have been previous net gains from sales or retirements of the same class of shares, the loss can be debited to Contributed Surplus to the extent of those gains. This is because the contributed surplus account may include gains from past transactions involving the company's own shares, and it can be used to absorb the losses from the current sale.Secondly, if there are no such gains in the Contributed Surplus, or if the loss exceeds those gains, the remaining amount of the loss is debited to Retained Earnings. Retained Earnings represent the accumulated net income of the company that has not been distributed to shareholders as dividends and is available to absorb losses. Option D is incorrect because specific losses from the sale of treasury shares are not typically recorded in a separate "Loss from Sale of Treasury Shares" account but are instead adjusted against Contributed Surplus or Retained Earnings as explained.