After a stock-based compensation expense of $100, Retained Earnings changes by what amount?

After a stock-based compensation expense of $100, Retained Earnings changes by what amount?

• A. Decreases by $60.
• B. Increases by $60.
• C. Decreases by $100.
• D. No change.

Answer: (A)

Stock-based compensation expense reduces reported earnings by the amount of the expense. Retained earnings track net income after taxes, so the effect is the after‑tax portion of the expense. Here, a $100 expense lowers pretax income by $100; the tax deduction reduces income tax expense, and with a 40% tax rate the after‑tax impact on net income is 100 × (1 − 0.40) = 60. Therefore, retained earnings decrease by $60. (Cash impact isn’t from recognizing the expense itself, since it’s noncash, though taxes payable would reflect the deduction.)

Stock-based compensation expense reduces reported earnings by the amount of the expense. Retained earnings track net income after taxes, so the effect is the after‑tax portion of the expense. Here, a $100 expense lowers pretax income by $100; the tax deduction reduces income tax expense, and with a 40% tax rate the after‑tax impact on net income is 100 × (1 − 0.40) = 60. Therefore, retained earnings decrease by $60. (Cash impact isn’t from recognizing the expense itself, since it’s noncash, though taxes payable would reflect the deduction.)