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When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for $ 1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $ 15 per share, to be held in the treasury, and three months later, sold 2,000 treasury shares at $ 19 per share. There were no other treasury share transactions.
-If, instead of holding the 4,000 shares as treasury shares, Oslo had decided to cancel them, Oslo should debit
A) Common Shares for $ 48,000 and Retained Earnings for $ 12,000.
B) Contributed Surplus for $ 48,000 and Retained Earnings for $ 12,000.
C) Contributed Surplus for $ 60,000.
D) Common Shares for $ 60,000.

Question

Quizplus · Accepted Answer

If Oslo had decided to cancel the 4,000 shares, it would have reduced the number of outstanding shares and increased retained earnings by the amount of the contributed surplus associated with the shares. The contributed surplus is the excess of the issue price over the par value of the shares. In this case, the contributed surplus is $12 per share, or $48,000 for the 4,000 shares.

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