On January 1, 2014, Sharp Corp. granted an employee an option to purchase 12,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $280,000. The option became exercisable on December 31, 2015, after the employee completed two years of service. The market prices of Sharp's stock were as follows: For 2015, should recognize compensation expense under the fair value method of

Question

On January 1, 2014, Sharp Corp. granted an employee an option to purchase 12,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $280,000. The option became exercisable on December 31, 2015, after the employee completed two years of service. The market prices of Sharp's stock were as follows:  For 2015, should recognize compensation expense under the fair value method of

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The fair value method requires that compensation expense recognized for stock options is based on the fair value of the options on the grant date, not the exercise date. The total compensation expense of $280,000 was determined using the Black-Scholes option pricing model on January 1, 2014, which is the grant date. Therefore, $280,000/3 years of vesting = $93,333 of compensation expense to be recognized each year from 2014-2016. In 2014 and 2015, the expense recognized would be $0 because the option was not yet exercisable. In 2015, the option became exercisable and the employee could choose to exercise it at a price of $20 per share when the market price is $30 per share. Therefore, the intrinsic value of the option is $10 per share, or $120,000 in total. Since the fair value expense recognized for 2015 is already $93,333, the remaining expense is $46,667 ($140,000 total - $93,333 already recognized). However, this should be reduced by the intrinsic value of the option, so the final compensation expense recognized for 2015 is $26,667 ($46,667 - $20,000). Therefore, the answer is C, $140,000.