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The ABC Co. granted on million employee stock options on June 30, 2006. Every option permitted the holder to buy one share of ABC common stock at $6, 00 per share that was also the stock’s selling price at that date. Options can be exercised any time after June 30, 2007.

Company used Black Scholes choice pricing model to find out fair value of the options at the grant date. That amount was $2 million. Suppose the service period in one year, ABC has a 12/31 year-end, and its tax rate is 40%.

a) Under FAS 123R, how would the transaction be reported in ABC’s 12/31/09 year-end financial statements (Balance sheet, Income statement, Cash flow statement)

b) Suppose that 20 % of options were terminated in January 2007 as certain employees had very recently left the company, Under FASB 123R, would these terminated options result in some sort of an adjustment? If there is the adjustment, create the suitable entry or entries?

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