In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2014. 90,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows: The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $900,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year endedDecember 31, 2015 under the fair value method?

Question

In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2014. 90,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:  The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $900,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year endedDecember 31, 2015 under the fair value method?

Quizplus · Accepted Answer

Under the fair value method, compensation expense should be recognized over the vesting period based on the fair value of the options granted. In this case, the total compensation expense is $900,000 to be recognized over a two-year period. Therefore, the amount of compensation expense to be recognized for the year ended December 31, 2015 would be $450,000 (which is half of the total expense).

In Order to Retain Certain Key Executives, Jensen Corporation Granted