Question

On December 31, 2014, Houser Company granted some of its executives options to purchase 90,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,800,000. The options become exercisable on January 1, 2015, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2015. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2014, as a result of this transaction under the fair value method?

a. $1,800,000 decrease
b. $600,000 decrease
c. $0
d. $600,000 increase

Answer 1

The impact on Houser's total stockholders' equity for the year ended December 31, 2014, due to the granted stock options is $0, as the compensation expense will be recognized over the three-year service period starting from January 1, 2015.

Step-by-step explanation:

The impact on Houser's total stockholders' equity for the year ended December 31, 2014, as a result of the stock option transaction under the fair value method, is c. $0. This is because the compensation expense related to the options granted to the executives will be recognized over the service period, which ranges from January 1, 2015 to the end of the three-year period. Thus, in 2014, there would be no impact on the equity as the service period had not yet commenced. The compensation cost of $1,800,000 will be recognized equally over the three-year service period, resulting in an annual expense of $600,000 ($1,800,000 divided by 3 years), and this will decrease the stockholders' equity accordingly in each of those years.