Callable Preferred Stock Journal Entry
Overview
In business, the company may call back (buy back) the preferred stock that it has issued previously for various reasons. Likewise, the company needs to make the journal entry for the callable preferred stock on the day that it buys back the stock.
Most preferred stock is callable preferred stock, in which the company usually has the power to buy back the preferred stock that is issued. And the call price, which is usually higher than the issued price, is usually stated in the preferred stock contract.
Callable preferred stock journal entry
When the company calls back the preferred stock, it can make the callable preferred stock journal entry by debiting the preferred stock account, additional paid-in capital account, and retained earnings account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Preferred stock | 000 | |
| Additional paid-in capital – preferred stock | 000 | |
| Retained earnings | 000 | |
| Cash | 000 |
In this journal entry of callable preferred stock, both total assets and total equity on the balance sheet decreased by the same amount.
Callable preferred stock example
For example, on June 01, the company ABC issues 10,000 shares of preferred stock at the price of $4 per share. All those shares of preferred stock are callable and have a par value of $1 per share.
Later, the company ABC decides to call back all 10,000 shares of preferred stock with the price of 5$ per share.
What are the journal entries for the above transactions of callable preferred stock?
Solution:
At issuing date of June 01:
When the company ABC issues the preferred stock on June 01, it can make the journal entry as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 40,000 | |
| Preferred stock | 10,000 | |
| Additional paid-in capital – preferred stock | 30,000 |
At the date when the preferred stock is called back:
When the company ABC calls back the shares, it can make the journal entry for callable preferred stock as below:
| Account | Debit | Credit |
|---|---|---|
| Preferred stock | 10,000 | |
| Additional paid-in capital – preferred stock | 30,000 | |
| Retained earnings | 10,000 | |
| Cash | 50,000 |
In this journal entry, both total assets and total equity decrease by $50,000 on the balance sheet of the company ABC.
Note:
Though it is a very rare case, if the called price of the preferred stock is the same as the issued price, the journal entry will not include the debit of the returned earnings account.
For example, if the call price in the above example is $4 per share the same as the issued price, the company ABC will make the journal entry as below instead:
| Account | Debit | Credit |
|---|---|---|
| Preferred stock | 10,000 | |
| Additional paid-in capital – preferred stock | 30,000 | |
| Cash | 40,000 |