Question

Motorsports Co. retires shares it buys back. In its first share repurchase transaction, Motorsports purchased stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the stock on retained earnings and paid-in capital?

Answer 1

When a company repurchases its own shares at a higher price, it affects retained earnings and paid-in capital. Retained earnings decrease as profits are used to buy back shares, while paid-in capital remains unaffected.

Step-by-step explanation:

When a company repurchases its own shares at a price higher than the original issuance price, it has an effect on both retained earnings and paid-in capital. Retained earnings represent the accumulated profits of the company that have not been distributed as dividends. When shares are repurchased at a higher price, the company's retained earnings decrease because it is using its profits to buy back shares. Paid-in capital, on the other hand, represents the amount of capital contributed by shareholders when they first purchased the stock. When shares are bought back at a higher price, it does not directly impact the paid-in capital, as it is a transaction between the company and shareholders in the secondary market.