On January 1, 2021, Black Inc. issued stock options for 260,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 8% in two years. Black initially estimates that it is probable the goal will be achieved. In 2022, after one year, Black estimates that it is not probable that divisional revenue will increase by 8% in two years. Ignoring taxes, what is the effect on earnings in 2022?

Multiple Choice

• $650,000 decrease.

• $325,000 increase.

• $650,000 increase.

• No effect.