On December 31, 2010, Gonzalez Company granted some of its executives options to

Question

On December 31, 2010, Gonzalez Company granted some of its executives options to purchase 100,000 shares of the company’s $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $750,000. The options become exercisable on January 1, 2011, and represent compensation for executives’ services over a three-year period beginning January 1, 2011. At December 31, 2011 none of the executives had exercised their options. What is the impact on Gonzalez’s net income for the year ended December 31, 2011 as a result of this transaction under the fair value method?

a. $250,000 increase.
b. $750,000 decrease.
c. $250,000 decrease.
d. $0.

Explanation / Answer

option "B" Is correct. Since the option contract was not exercissed by them on december 31 st of 2011, the option compansation expenses has been arrived $750000 as per black&scholes model on 1st jan 2011. hence it will replicate on the same year INCOME STATEMENT and impact on net income by decrease of 750000 on 31st december 2011. Note:Being Compansation is nature of Expense it would dcrease the net income by $750000.

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