Question

On December 31, 2014, Kessler Company granted some of its executives options to purchase 45,000 shares of the company's $10 par common stock at an option price of $50 per share. The options become exercisable on January 1, 2015, and represent compensation for executives' services over a three-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $270,000. At December 31, 2015, none of the executives had exercised their options. What is the impact on Kessler's net income for the year ended December 31, 2015 as a result of this transaction under the fair value method?

a. $90,000 increase
b. $0
c. $90,000 decrease
d. $270,000 decrease

Answer 1

Under the fair value method, the stock option transaction results in a $90,000 decrease to Kessler's net income for the year ended December 31, 2015, with one-third of the total compensation expense recognized each year over the three-year service period.

Step-by-step explanation:

The impact on Kessler's net income for the year ended December 31, 2015, as a result of the stock option transaction under the fair value method is a $90,000 decrease. This is because the total compensation expense of $270,000 determined by the Black-Scholes option pricing model is recognized over the service period of three years. Therefore, one-third of the total expense, or $90,000, is recognized in 2015, reducing the net income by that amount.