On January 2, 2011, Stoner Corporation granted stock options to key employees for the purchase of 60,000 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, 2013, by grantees still in the employ of the company. The fair value of the option determined by an option pricing model is $7 at the grant date. Stoner plans to distribute up to 60,000 shares of treasury stock when options are exercised. The treasury stock was acquired by Stoner at a cost of $28 per share and was recorded under the cost method. Assume that no stock options were terminated during the year. How much should Stoner charge to Compensation Expense for the year ended December 31, 2011?

Question

Quizplus · Accepted Answer

The total compensation expense is calculated as the fair value of the options ($7) multiplied by the number of options (60,000), which equals $420,000. Since the options are intended to compensate employees over two years, the expense for one year is $420,000 / 2 = $210,000.

On January 2, 2011, Stoner Corporation Granted Stock Options to Key