On January 1, Year 1, Davenport Corporation granted an employee 10,000 options to purchase 10,000 shares of Davenport's $10 par common stock at $30 per share. The options became exercisable on December 31, Year 3, after the employee completed three years of service. The option was exercised on February 1, Year 4. The market prices of Davenport's stock were as follows: January 1, Year 1, $40; December 31, Year 3, $60; and February 1, Year 4, $55. An options pricing model estimated the value of the options at $20 each on the grant date. For Year 1, Davenport should recognize compensation expense of ________. (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The correct answer is B because the compensation expense is calculated as the difference between the fair value of the options and the exercise price multiplied by the number of options granted. The fair value of the options on the grant date is $20 per option, and the exercise price is $30 per share. Therefore, the compensation expense is $20 * (10,000 options) = $200,000. However, the compensation expense is recognized over the vesting period, which is three years in this case. Therefore, the compensation expense for Year 1 is $200,000 / 3 = $66,667.

On January 1, Year 1, Davenport Corporation Granted an Employee