In order to retain certain key executives, Jensen Corporation granted them incentive share options on December 31, 2009.50,000 options were granted at an option price of $35 per share.Market prices of the shares were as follows:

The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2010.The Black-Scholes option pricing model determines total compensation expense to be $500,000.What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2010 under the fair value method?

Question

In order to retain certain key executives, Jensen Corporation granted them incentive share options on December 31, 2009.50,000 options were granted at an option price of $35 per share.Market prices of the shares were as follows:

The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2010.The Black-Scholes option pricing model determines total compensation expense to be $500,000.What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2010 under the fair value method?

Quizplus · Accepted Answer

Under the fair value method, compensation expense should be recognized over the service period based on the fair value of the options at the grant date. The fair value of the options can be calculated using the Black-Scholes option pricing model.

For the year ended December 31, 2010, only one year of the two-year service period has elapsed. Therefore, the compensation expense to be recognized should be half of the total compensation expense, which is $500,000/2 = $250,000.

Therefore, the correct answer is choice A.

In Order to Retain Certain Key Executives, Jensen Corporation Granted