Question

On December 31, 2017, Houser Company granted some of its executives options to purchase 150,000 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 $3,000,000. The options become exercisable on January 1, 2018, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2018. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2017, as a result of this transaction under the fair value method

Answer 1

Answer: $1,000,000 decrease

Step-by-step explanation:

From the information above, the Black-Scholes option pricing model determines that the total compensation expense to be $3,000,000 and the option was for a 3 year period.

The impact on Houser's total stockholders' equity for year ended December 31, 2017, based on this transaction under the fair value method will be:

Total compensation expense/time period= $3,000,000/3= $1,000,000

decrease in net income because of compensation expense.