On January 2,2014,Sanders Corporation granted stock options to key employees for the purchase of 60,000 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 1,2016,by grantees still in the employ of the company.The fair value of the option determined by an option pricing model is $7 at the grant date.Sanders plans to distribute up to 60,000 shares of treasury stock when options are exercised.The treasury stock was acquired by Sanders at a cost of $28 per share and was recorded under the cost method.Assume that no stock options were terminated during the year.How much should Sanders charge to Compensation Expense for the year ended December 31,2014?

Question

Quizplus · Accepted Answer

Compensation expense = (fair value of the option / vesting period) * number of options

Fair value of the option = $7 per share
Vesting period = 2 years 
Number of options = 60,000 shares

Therefore, compensation expense = ($7 / 2) * 60,000 = $210,000.

Option A is incorrect because it takes into account the entire value of the options over the four-year period instead of just the vesting period of 2 years.

Option C is incorrect because it doesn't take into account the fair value of the options granted.

Option D is incorrect because it doesn't take into account the number of options granted.

On January 2,2014,Sanders Corporation Granted Stock Options to Key Employees