Question

On January 1, 2021, Black Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Black initially estimates that it is probable the goal will be achieved. In 2022, after one year, Black estimates that it is not probable that divisional revenue will increase by 6% in three years.
Required:
a. Ignoring taxes, what is the effect on earnings in 2022?

Answer 1

Answer:

The correct answer is $400,000 (increase).

Explanation:

According to the scenario, computation of the given data are as follows:

Stock issued = 200,000 shares

Fair value = $6

Time period = 3 years

So, we can calculate the effect on earnings by using following formula:

Effects on earning = Stock issued × Fair value ÷ Time period

By putting the value, we get

Effects on earning = 200,000 × 6 ÷ 3

= $400,000 (Increase)