Under its executive stock option plan,N Corporation granted options on January 1,2016,that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years,but not before December 31,2018 (the vesting date).The exercise price is the market price of the shares on the date of grant,$18 per share.The fair value of the options,estimated by an appropriate option pricing model,is $4 per option.No forfeitures are anticipated.Ignoring taxes,what is the effect on earnings in the year after the options are granted to executives?
A)$ 0.
B)$20 million.
C)$60 million.
D)$90 million.

Question

Quizplus · Accepted Answer

The effect on earnings in the year after the options are granted to executives is equal to the amount of compensation expense recognized for the options. The compensation expense is calculated as the fair value of the options ($4 per option) multiplied by the number of options granted (15 million). Therefore, the total compensation expense is $60 million, which will reduce earnings by the same amount.

Under Its Executive Stock Option Plan,N Corporation Granted Options on January