On January 1, 2018, Tunis Inc. granted stock options for 50,000 of its no par value common shares to key employees, at an option price of $ 25. On that date, the market price of the common shares was $ 23. The Black-Scholes option pricing model determined total compensation expense to be $ 375,000. The options are exercisable beginning January 1, 2021, provided the key employees are still employed by Tunis at the time the options are exercised. The options expire on January 1, 2022. On January 2, 2021, when the market price of the shares was $ 29 per share, all 50,000 options were exercised. The amount of compensation expense Tunis should have recorded for calendar 2020 is
A) $ 0.
B) $ 50,000.
C) $ 125,000.
D) $ 187,500.

Question

Quizplus · Accepted Answer

The compensation expense related to the stock options should be recognized over the vesting period, which is from January 1, 2018, to January 1, 2021. Therefore, for the year ended December 31, 2020, Tunis should have recognized compensation expense for 2 years (2018 and 2019) out of the 3-year vesting period.

The total compensation expense determined by the Black-Scholes option pricing model was $ 375,000, which should be recognized over 3 years. Therefore, the compensation expense for 2 years (2018 and 2019) is $250,000 ($375,000/3 × 2).

Since none of the options were exercised in 2020, no additional compensation expense should be recognized for that year. Therefore, the amount of compensation expense Tunis should have recorded for calendar 2020 is $125,000 ($250,000/2).

Thus, the best choice is C.