How would the exercise of an option, that was part of an initial 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 price determined by the Black-Sholes model.
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 cash received plus the contributed surplus initially recorded.

Question

Quizplus · Accepted Answer

When an option that was part of an initial compound instrument is exercised, the accounting treatment involves recording the common stock at an amount equal to the cash received plus any contributed surplus initially recorded for the option. This approach reflects the actual consideration received by the company (cash plus the value of the option rights given up by the option holder), ensuring that the equity issued is recorded at its full transaction value.

How Would the Exercise of an Option, That Was Part