A is corrent. A stock option is a financial instrument that is recorded at its fair value and is remeasured to fair value at the end of each reporting period with the gains and losses reported in income of the period. On December 1, when Bann acquired the option, its fair value was $600. At the end of the reporting period on December 31, the fair value of the stock had increased by $3 per share ($43 – 40) and the fair value of the time value component of the option decreased to $400. Therefore, the fair value of the option at December 31 was ($3 × 2,000 shares + $400) = $6,400. The change in the fair value of the option was $6,400 – $600, resulting in a $5,800 increase in fair value. Net income is increased by the change in the fair value of the option in the amount of $5,800.
B is incorrect. A stock option is a financial instrument that is recorded at its fair value and is remeasured to fair value at the end of each reporting period with the gains and losses reported in income of the period. On December 1, when Bann acquired the option, its fair value was $600. At the end of the reporting period on December 31, the fair value of the stock had increased by $3 per share ($43 – 40) and the fair value of the time value component of the option decreased to $400. Therefore, the fair value of the option at December 31 was ($3 × 2,000 shares + $400) = $6,400. The change in the fair value of the option was $6,400 – $600, resulting in a $5,800 increase in fair value. Net income is increased by the change in the fair value of the option in the amount of $5,800.
C is incorrect. A stock option is a financial instrument that is recorded at its fair value and is remeasured to fair value at the end of each reporting period with the gains and losses reported in income of the period. On December 1, when Bann acquired the option, its fair value was $600. At the end of the reporting period on December 31, the fair value of the stock had increased by $3 per share ($43 – 40) and the fair value of the time value component of the option decreased to $400. Therefore, the fair value of the option at December 31 was ($3 × 2,000 shares + $400) = $6,400. The change in the fair value of the option was $6,400 – $600, resulting in a $5,800 increase in fair value. Net income is increased by the change in the fair value of the option in the amount of $5,800.
D is incorrect. A stock option is a financial instrument that is recorded at its fair value and is remeasured to fair value at the end of each reporting period with the gains and losses reported in income of the period. On December 1, when Bann acquired the option, its fair value was $600. At the end of the reporting period on December 31, the fair value of the stock had increased by $3 per share ($43 – 40) and the fair value of the time value component of the option decreased to $400. Therefore, the fair value of the option at December 31 was ($3 × 2,000 shares + $400) = $6,400. The change in the fair value of the option was $6,400 – $600, resulting in a $5,800 increase in fair value. Net income is increased by the change in the fair value of the option in the amount of $5,800.
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