On December 31, 2014, Gonzalez Company granted some of its executives options to purchase 150,000 shares of the company's $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,125,000. The options become exercisable on January 1, 2015, and represent compensation for executives' services over a three-year period beginning January 1, 2015. At December 31, 2015 none of the executives had exercised their options. What is the impact on Gonzalez's net income for the year ended December 31, 2015 as a result of this transaction under the fair value method?

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Under the fair value method, compensation expense for stock options is recognized over the service period, regardless of whether or not the options are exercised. In this case, the executives will receive the options as compensation for their services over a three-year period. The total compensation expense determined by the Black-Scholes option pricing model is $1,125,000, which should be recognized over the three-year service period.

Since only one year has passed, the portion of the compensation expense that should be recognized in 2015 is $375,000 ($1,125,000 ÷ 3 years). This amount will be recorded as an increase to compensation expense and a corresponding credit to a liability account. As a result, the impact on Gonzalez's net income for the year ended December 31, 2015 will be a decrease of $375,000.

On December 31, 2014, Gonzalez Company Granted Some of Its