What must the reacquisition of treasury shares be supported by?

The correct answer is that the reacquisition of treasury shares must be supported by restricted retained earnings. This practice stems from the principle that a corporation needs to ensure it has adequate resources set aside for the potential obligations that come with repurchasing shares, which may affect the financial viability of the company.

In many jurisdictions, the use of retained earnings for treasury stock transactions is regulated. Specifically, restricted retained earnings act as a safeguard, ensuring that the funds used for reacquisition do not jeopardize the company’s ability to meet its liabilities. The restriction prevents the distribution of those earnings as dividends, thereby maintaining sufficient capital within the company to cover its operational needs and obligations.

Retained earnings that are unrestricted would not have the same level of protection, as they could be freely used for dividends or other corporate purposes, potentially impacting the financial stability of the firm. Therefore, it is essential that reacquiring treasury shares is done with careful consideration of restricted retained earnings to protect the interests of creditors and the ongoing operational health of the corporation.