On January 31 of the Current Year,Sophia Pays $1,000 for an Option

question 2

Multiple Choice

On January 31 of the current year,Sophia pays $1,000 for an option to acquire 100 shares of Texas Corporation common stock for $105 per share at any time prior to December 31.As of December 31,Sophia had not exercised the option or sold it.Which of the following statements is correct?

• A)Sophia may recognize a $1,000 STCL.
• B)Sophia may recognize a $1,000 LTCL.
• C)Sophia may recognize a $1,000 ordinary income.
• D)Sophia may not recognize a loss.

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Definitions:

Contribution Margin

The difference between sales revenue and variable costs, representing the portion of sales that helps cover fixed costs.

Sales

The transactions or business activities related to selling goods or services, generating revenue for the company.

Production Facilities

Physical premises where goods are manufactured or produced, often encompassing buildings, machinery, and equipment.

Absorption Costing

An accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.