Financial Accounting and Reporting-CPA Practice Exam

What financial statement component relates to the repurchase of stock at a price above par value for retirement?

1. Common stock

2. Treasury stock

3. Paid-in capital

4. Retained earnings

The correct answer is: Paid-in capital

The component of the financial statements that relates to the repurchase of stock at a price above par value for retirement is paid-in capital. When a company repurchases its own stock, the transaction affects its equity accounts. Specifically, the amount paid in excess of the par value of the stock is typically drawn from paid-in capital, which represents the additional investments made by shareholders beyond the par value of the issued shares. In this scenario, if the stock is bought back at a price higher than its par value, the excess amount over par is recorded as a reduction in the paid-in capital account related to that specific class of stock. This reflects the notion that the company is using its capital resources to buy back shares, hence affecting its overall equity structure. The common stock account would not be directly affected by this transaction since it only reflects the par value of shares issued, and any repurchased shares do not remain in this account. Similarly, treasury stock accounts for shares that a company has repurchased, but it does not address the specific excess over par value that would be adjusted within paid-in capital. Retained earnings are not involved in the repurchase of stock but rather represent cumulative profits that are not distributed as dividends, thus they are not relevant in this particular