Howell Company began business on March 1, 2017.At that time, it granted 250,000

Question

Howell Company began business on March 1, 2017.At that time, it granted 250,000 options, with a strike price of $5, to computer engineers in lieu of signing bonuses. The fair value of each option was estimated at $1 and the options vest over four years. What benefits did Howell Company create by granting options to the engineers instead of cash signing bonuses? What is the total expense that the company will record associated with the options granted in 2017? What will Howell record in 2017 for stock-option compensation expense?How will the exercise of the options impact the balance sheet, income statement, and statement of cash flows?

Explanation / Answer

a) The benefit of granting options instead of cash signing bonus is the way to motivate highly qualified job candidates and helps keep them for the long term and it is cost effective employee benefit plan for the companies and increase the cash inflow of the companies as employees pay the exercise price for their options. b) Total Expenses = 250,000 options x $1 fair Value = $250,000 c) Stock option compensation Expenses = $250,000/4 = $62,500 c) Excercising Option will reduced the Diluted Earning per share in Income statement Balance Sheet = On the excercise date employee purchased the stock option at exercise price it will increase the cash and will be debited. If the stock sold above the par value then additional paid in capital will increase and will be credited and common stock will be credited with the par value . Cash flow statement - It will accounted under financing activities.

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