Textbook Problem

You’ve been hired to perform an audit of Hubbard Company for the year ended December 31, 2019. You find the following account balances related to shareholders’ equity:

Because of the antiquated terminology and negative balance, you examine the Capital Surplus account and find the following entries:

Your examination of the Preferred Stock and Common Stock accounts reveals that the amounts shown correctly state the total par value of the issued capital stock. The Retained Earnings account contains the accumulated earnings of the company, with the exception of any items of retained earnings that were inappropriately debited or credited to the Capital Surplus account.

Required:

1. 1. Prepare whatever journal entries are necessary to eliminate the Capital Surplus account and to correct Hubbard’s shareholders’ equity accounts.
2. 2. Prepare a corrected shareholders’ equity section of Hubbard’s December 31, 2019, balance sheet. Include any related notes to its financial statements.