Now FASB required that all employee stock options should be expensed on income s

Question

Now FASB required that all employee stock options should be expensed on income statement. On Jan. 2005, AA company granted total $100,000 (fair value) of stock options to the employee. The exercise price is equal to the market price at the grant time. The employees cannot exercise the options until 2007. According to the new requirement, the company should record an expense $50,000 for 2005 and $50,000 for 2006. During 2008, all options are exercised. What is the effect on the total equity at the end of 2006?

Explanation / Answer

The given question effect will be the following:

It will decrease the total equity in 2006.

As expense is recognised but no option can be exercised till 2007.
So it will have a effect of decrease on equity

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