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In September，Year 1，West Corp. made a dividend distribution of one right for each of its 120，000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share.On March 20，Year 5，none of the rights had been exercised，and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption，West's stockholders' equity was reduced by：
a.$36，000
b.$12，000
c.$120
d.$2，400
Explanation
Choice “b” is correct. In Year 1，no dividend was recorded since none of the rights were exercised and no value was assigned. In Year 5，redemption reduced equity by $12，000 [120，000 rights x $.10 per share].
Choice “c” is incorrect. Since each right is exercisable for 1/100 of a share，the total potential shares to be purchased with the rights totals 1，200 shares （120，000 rights @ $.10 per share）。This choice erroneously multiplies the redemption price of $.10 times 1，200 shares.
Choice “d” is incorrect. This choice erroneously divides the 120，000 rights by the $50 par value. This is a meaningless amount.
Choice “a” is incorrect.This choice erroneously multiplies the 1，200 shares by the $30 difference between $50 par and $80 exercise price.This amount would be credited to APIC if the rights were exercised.
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