Question

On December 29, year 6, Kolek Company granted 100,000 stock options to a group of 100 employees, enabling each employee to buy 1,000 shares for $20 per share. On the grant date, the shares had a market value of $16 per share and the options had a market value of $3.00 per option. The options vest over a 3-year period and become exercisable on January 1, year 10. Kolek Company expects that, based on historical turnover, they will lose approximately 3 of the employees receiving the options per year during the vesting period. Compensation expense will be recognized uniformly over the vesting period. Assuming all 100,000 options are exercised, what will be the net increase or decrease in stockholders’ equity as a result of the granting and exercising of the options

Answer 1

Answer: the net increase in stockholders’ equity as a result of the granting and exercising of the options will be $2,000,000

Explanation:

The granting of the stock options will result in total compensation expense of $300,000 over the 3-year vesting period, which will ultimately reduce retained earnings. It will be accompanied, however, by increases in additional paid in capital resulting in no net change to total stockholders' equity.

When the options are exercised, the company will be receiving $20 per share for 100,000 shares being issued, increasing stockholders' equity by $2,000,000.