On January 1, Year 1, Fields Corporation granted 500,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. The vesting period is 3 years. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $12 on the date of grant. What amount should Fields recognize as compensation expense for Year 1?

Question

Quizplus · Accepted Answer

The fair value of the options on the date of grant is $12 per option. The total fair value of the 500,000 options is $6,000,000 (500,000 x $12). The vesting period is 3 years, so the compensation expense should be recognized over 3 years. The annual compensation expense is $2,000,000 ($6,000,000 / 3).

On January 1, Year 1, Fields Corporation Granted 500,000 Stock