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How do you account for cancelled options?

As part of a share repurchase program, we allowed optionees to participate with their vested shares. For the sake of efficiency and not having to first exercise and then repurchase the shares, we simply cancelled the options in exchange for consideration. The consideration was the repurchase price (same as offered to shareholders) less the exercise price. A couple of the optionees are board advisors and their grants were NSOs. One was an employee who's options were ISOs. We have treated the excess of FMV over the repurchase price as compensation for taxation purposes for the employee, but now trying to determine the proper entries to make using this example: Number of shares: 1000 Exercise price: $0.15 FMV: $0.40 Repurchase Price: $1.00 Would it be treated similarly to a repurchase of stock (i.e., treasury stock) or retirement of stock and charged against retained earnings?

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