On December 31, 2014, Gonzalez Company granted some of its executives options to purchase 100,000 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 $750,000. The options 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

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6 May, 10:44

On December 31, 2014, Gonzalez Company granted some of its executives options to purchase 100,000 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 $750,000. The options 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

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Armando Bell · Answer 1

Net income will decrease by = $250,000

Explanation:

As per the data given in the question,

Compensation = $750,000

Period of executive services = 3 years

Impact every year = Compensation : Period of executive services

= $750,000 : 3

= $250,000

Even if none of the employees has exercised the option, the expense would be booked and net income will decrease.

Hence, impact on Gonzalez's net income for the year will decrease by $250,000