Financial Accounting and Reporting-CPA Practice Exam

Upon retirement of repurchased stock, which account would NOT be affected?

1. Paid-in capital

2. Common stock

3. Treasury stock

4. Retained earnings

The correct answer is: Treasury stock

When a company retires repurchased stock, it effectively cancels the shares that it had previously bought back. This action reduces the number of outstanding shares and allows the company to decrease its overall capital stock structure. In this scenario, treasury stock is the account that holds the cost of the shares repurchased by the company. When the stock is retired, this treasury stock account is eliminated because the purchased shares are no longer on the balance sheet. Therefore, the cost of the treasury stock is removed, which directly affects the treasury stock account. The common stock and paid-in capital accounts will be adjusted as well; common stock will decrease since the shares are no longer outstanding and the paid-in capital might also reflect an adjustment based on how the stock was bought back and canceled. Retained earnings may also be adjusted depending on the method used for retirement, especially if the repurchase price exceeded the original issuance price. Therefore, the treasury stock account is the only account that is not impacted in the sense that it specifically reflects the transaction of retiring the repurchased shares. While its previous balance is removed, it does not get directly "affected" in terms of adjustment. The other accounts involve changes reflecting the overall accounting implications of the retirement process.