The following accounts were among those reported on Luna Corp.’s balance sheet at December 31, 2005:
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Available-for-sale securities (market value $140,000) |
$ 80,000 |
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Preferred stock, $20 par value, 20,000 shares issued and outstanding |
400,000 |
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Additional paid-in capital on preferred stock |
30,000 |
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Retained earnings |
900,000 |
On January 20, 2006, Luna exchanged all of the available-for-sale securities for 5,000 shares of Luna’s preferred stock. Market values at the date of the exchange were $150,000 for the available-for-sale securities and $30 per share for the preferred stock. The 5,000 shares of preferred stock were retired immediately after the exchange. Which of the following journal entries should Luna record in connection with this transaction?
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Debit |
Credit |
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a. |
Preferred stock |
100,000 |
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Additional paid-in capital on preferred stock |
7,500 |
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Retained earnings |
42,500 |
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Available-for-sale securities |
80,000 |
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Gain on exchange of securities |
70,000 |
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b. |
Preferred stock |
100,000 |
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Additional paid-in capital on preferred stock |
30,000 |
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Available-for-sale securities |
80,000 |
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Additional paid-in capital from retirement of preferred stock |
50,000 |
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c. |
Preferred stock |
150,000 |
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Available-for-sale securities |
80,000 |
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Additional paid-in capital on preferred stock |
70,000 |
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d. |
Preferred stock |
150,000 |
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Available-for-sale securities |
80,000 |
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Gain on exchange of securities |
70,000 |
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