Hi there,

I have prepared my answers (in Italic) to the homework questions as below. Can you please review and advise your comments before submission.

Kind regards,

Shigemi

Analyzing Stock-Based Compensation

Howell Company began business on March 1, 2017.At that time, it granted 250,000 options, with a strike price of $5, to computer engineers in lieu of signing bonuses.The fair value of each option was estimated at $1 and the options vest over four years.

a. What benefits did Howell Company create by granting options to the engineers instead of cash signing bonuses?

- The engineers are given the right to purchase shares at a fixed strike price of $5 after completing a requisite service period.Granting the right will create incentives for the engineers to work hard that improve company performance to raise the stock price as well as encourage them to stay with the company longer.

b. What is the total expense that the company will record associated with the options granted in 2017?

- 250,000 options x $1.00 = $250,000

c. What will Howell record in 2017 for stock-option compensation expense?

- 250,000 options x $1.00 x (10/48 months) = $52,083

d. How will the exercise of the options impact the balance sheet, income statement, and statement of cash flows?

- Balance sheet

When the options are purchased at the exercise price (the strike price), the amount of cash increases.Depending on the price of the stock sold, there will be a positive or negative value of additional paid in capital.If the stock sold above the par value the value of APIC is positive while if it's below the value is negative.

- Income statement

It will reduce the diluted EPS per share.

- Statement of cash flows

It will be recorded as a financing activity.