I need help with this problem:

Client X offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that employee stock options, like all obligations to issue the corporation's own stock, are equity. The new staff accountant, Marcy Means, disagrees. Marcy argues that when a company issues stock for less than current value, the value of preexisting stockholders' shares is diluted.

Pretendyou are hired to debate the issue of the proper treatment of options written on a company's own stock.

1. Describe how Client X should account for its employee stock option plan under existing GAAP.
2. I need to create a summary of my argument, citing concepts and definitions to buttress my case:
3. You are siding with John.