Retirement of Preferred Stock

I recently had a twitter question that I want to share.

"Purchased and retired 20,000 preferred shares at $130 per share (assume par value of $100 and we issued the 20,000 shares at $150) -- what's the journal entry?"

When we retire preferred stock we must ensure that the amount of the preferred stock (par value) is taken out of the preferred stock account and additional paid in capital in excess of par preferred (if any) must also be removed from the books.

Using the above transactions as our example, we would make the following journal entry:

Preferred Stock (at par)                                                                   2,000,000
Additional Paid in Capital in Excess of Par - Preferred                  1,000,000
              Cash                                                                                                        2,600,000
              Retained Earnings                                                                                      400,000


Please continue to send your questions. My hope is that I will be able to post your question and answer to my blog each week.

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