On January 1,Year 1,Davenport Corporation granted an employee an option to purchase 10,000 of Davenport's $10 par common stock at $30 per share.The options became exercisable on December 31,Year 3,after the employee completed three years of service.The option was exercised on February 1,Year 4.The market prices of Davenport's stock were as follows: January 1,Year 1,$40; December 31,Year 3,$60; and February 1,Year 4,$55.An options pricing model estimated the value of the options at $12 each on the grant date.For Year 1,Davenportt should recognize compensation expense of ________.

Question

Quizplus · Accepted Answer

The compensation expense is calculated based on the fair value of the options at the grant date, which is $12 per option. Since the options vest over three years, the total compensation expense is $12 * 10,000 = $120,000, recognized evenly over three years. For Year 1, the expense is $120,000 / 3 = $40,000.

On January 1,Year 1,Davenport Corporation Granted an Employee an Option