Under its executive stock option plan, N Corporation granted options on January 1, 2009, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2011 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?
A)$ 0
B)$20 million
C)$60 million
D)$90 million The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year.

Question

Quizplus · Accepted Answer

The total compensation cost of $60 million ($4 per option * 15 million options) is recognized over the three-year vesting period, resulting in an expense of $20 million per year.

Under Its Executive Stock Option Plan, N Corporation Granted Options