On January 1, 2016, Watchtower Corporation granted Emma Freegross, its president, a compensatory stock option plan to purchase 8,000 shares of Watchtower's $10 par common stock. The option price is $25 per share and the option has a fair value of $7 per option. The option is exercisable on January 1, 2020, after four years of service. How much compensation expense should Watchtower recognize on December 31, 2016?
A) $0
B) $14,000
C) $56,000
D) $80,000

Question

Quizplus · Accepted Answer

The total compensation expense is calculated as the fair value of the options ($7 per option) times the number of options (8,000), which equals $56,000. This expense is recognized over the service period of four years, so for one year (2016), the expense is $56,000 / 4 = $14,000.

On January 1, 2016, Watchtower Corporation Granted Emma Freegross, Its