On January 1,2016,G Corp.granted stock options to key employees for the purchase of 80,000 shares of the company's common stock at $25 per share.The options are intended to compensate employees for the next two years.The options are exercisable within a four-year period beginning January 1,2018,by the grantees still in the employ of the company.No options were terminated during 2016,but the company does have an experience of 4% forfeitures over the life of the stock options.The market price of the common stock was $31 per share at the date of the grant.G Corp.used the Binomial pricing model and estimated the fair value of each of the options at $10.What amount should G charge to compensation expense for the year ended December 31,2016?
A)$307,200.
B)$320,000.
C)$384,000.
D)$400,000.

Question

Quizplus · Accepted Answer

The compensation expense for the stock options should be recognized over the two-year service period of the employees, which is from January 1, 2016, to December 31, 2017.

To calculate the compensation expense, we need to first determine the fair value of the options at the grant date. Since the company used the Binomial pricing model and estimated the fair value of each option to be $10, we can use this value as the grant-date fair value.

Next, we need to calculate the total compensation expense by multiplying the grant-date fair value by the number of options granted and the proportion of the service period completed in the current year.

The number of options granted is 80,000, and the proportion of the service period completed in 2016 is 1/2 or 50%.

The total compensation expense for 2016 can be calculated as follows:

Total compensation expense = Grant-date fair value x Number of options x Proportion of service period completed 
Total compensation expense = $10 x 80,000 x 50% 
Total compensation expense = $400,000

Therefore, the correct answer is C) $384,000, as the company should also consider the possibility of forfeiture, which is estimated at 4% over the life of the options. As the options were granted for two years, and each option is exercisable within a four-year period beginning January 1, 2018, the life of the options is six years. The company should adjust for the estimated forfeiture rate, resulting in a total compensation expense of $384,000.