Question

In September, Year 1, West Corp. made a dividend distribution of one right for each of its 120,000 shares ofoutstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rightshad been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of thisredemption, West's stockholders' equity was reduced by:a. $120b. $2,400c. $12,000d. $36,000

Answer 1

Answer:

The correct answer is option C.

Explanation:

Dividend distribution in the first year = 120,000 shares of outstanding common stock

Each right was exercisable.

Though none of the rights have been exercised.

The shares have been redeemed by paying each stockholder=$0.10/right

Reduction in the West's stockholder's equity

=Number of shares*amount paid for redemption

=120,000*$.10

=$12,000

So, option C is the right answer.