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.