How would exercise of warrants,that were part of the original compound instrument,be recorded?
A)Common stock is recorded at an amount equal to the fair value of the options at date of conversion.
B)Common stock is recorded at an amount equal to the cash received plus the contributed surplus initially recorded
C)Common stock is recorded at an amount equal to the market price of the shares on conversion date.
D)Common stock is recorded at an amount equal to the price determined by the Black-Sholes model.

Question

Quizplus · Accepted Answer

When exercise of warrants that were part of the original compound instrument occurs, common stock is recorded at an amount equal to the cash received plus the contributed surplus initially recorded. This is because the contributed surplus is initially recorded when the warrants are issued, and it represents the difference between the proceeds from issuing the compound instrument and the fair value of the liability component of the instrument. When the warrants are exercised, the company receives cash and the liability component is reduced, resulting in an increase in the equity component (common stock and contributed surplus). Therefore, common stock is recorded at the cash received plus the contributed surplus initially recorded.

How Would Exercise of Warrants,that Were Part of the Original