Q:

Arts Corporation provides a generous employee compensation package that adds employee stock options. The exercise price has always been same to the market price of the stock at the date of grant. The corporate controller, John Jones, thinks that employee stock options, like all obligations to issue the corporation's own stock, are equity. Marcy Means, new staff accountant, disagrees. Marcy argues that when a company issues stock for less than present value, the value of preexisting stockholders' shares is diluted.

Required:

a. Explain how Arts Corporation should account for its employee stock option plan, under existing GAAP.

b. Pretend you are hired to debate the issue of the proper treatment of options written on a company's own stock. Evaluate your argument, citing concepts and definitions to buttress your case, suppose

i. You are siding with John

ii. You are siding with Marcy