XO Group compensates top management using stock options. On January 1, Year 1, XO issued 36,000 options to purchase $1 par value common stock for $20 per share (which is the current stock price). The vesting period is 3 years, after which the options can be exercised anytime during the 7 years thereafter. At the grant date, the fair value of the option is $2. At December 31, Year 1, one year has passed. What is the total effect of the one-year time passage on current period income and shareholders' equity? (Hint: When considering the effect on shareholders' equity, remember the relation between current period income and retained earnings.)
| a. Current period income decreases by $24,000, and shareholders' equity does not change. | | |
| b. Both current period income and shareholders' equity decrease by $24,000. | | |
| c. Current period income decreases by $24,000, and shareholders' equity increases by $24,000. | | |
| d. Neither current period income nor shareholders' equity changes. | |