Question

On December 31, 2014, Gonzalez Company granted some of its executives options to purchase 150,000 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 $1,125,000. The options become exercisable on January 1, 2015, and represent compensation for executives' services over a three-year period beginning January 1, 2015. At December 31, 2015 none of the executives had exercised their options. What is the impact on Gonzalez's net income for the year ended December 31, 2015 as a result of this transaction under the fair value method?

a. $ 375,000 increase.
b. $1,125,000 decrease.
c. $ 375,000 decrease.
d. $0.

Answer 1

The impact on Gonzalez's net income for the year ended December 31, 2015 as a result of this transaction under the fair value method is a $375,000 increase.

Step-by-step explanation:

The impact on Gonzalez's net income for the year ended December 31, 2015 as a result of this transaction under the fair value method is a. $375,000 increase. To determine the impact on net income, we need to calculate the compensation expense recognized for the year. The Black-Scholes option pricing model determines total compensation expense to be $1,125,000. Since the options represent compensation for executives' services over a three-year period beginning January 1, 2015, one-third of the total expense is recognized each year. Therefore, the compensation expense recognized for the year ended December 31, 2015 would be $1,125,000 / 3 = $375,000, resulting in a $375,000 increase in net income for the year.