On January 1, 2009, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2011, by the grantees still in the employ of the company. No options were terminated during 2009, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the Binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2009?
A)$307,200.
B)$320,000.
C)$384,000.
D)$400,000.Total compensation is $800,000 (80,000 options estimated fair value of $10 each) times 96% = $768,000 divided by 2-year service period = $384,000 per year.

Question

Quizplus · Accepted Answer

The total compensation for the stock options is calculated as 80,000 options x $10 estimated fair value = $800,000. However, there is an estimated 4% forfeitures over the life of the stock options, so the total compensation expense is $800,000 x 96% = $768,000. Since the options are intended to compensate employees for the next two years, the annual compensation expense is $768,000/2 = $384,000. Therefore, the amount that G Corp. should charge to compensation expense for the year ended December 31, 2009, is $384,000. Therefore, the best choice is option C.