Question

On December 31, 2010, Houser Company granted some of its executives options to purchase 45,000 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 $900,000. The options become exercisable on January 1, 2011, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2011. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2010, as a result of this transaction under the fair value method?

a. $900,000 decrease
b. $300,000 decrease
c. $0
d. $300,000 increase

Answer 1

Under the fair value method, no impact on Houser's stockholders' equity is recorded in 2010 since the compensation expense is recognized over the options' three-year vesting period starting January 1, 2011.

Step-by-step explanation:

The impact on Houser's total stockholders' equity for the year ended December 31, 2010, as a result of the stock option transaction under the fair value method is $0. This is because the total compensation expense is recognized over the vesting period, which is the period the executives earn the options. Since the vesting period begins on January 1, 2011, and spans a three-year period, no expense is recognized in 2010. Therefore, the correct answer is c. $0.