On January 1, 2014, 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, which is exercisable on January 1, 2018, after four years of service. How much compensation expense should Watchtower recognize on December 31, 2014?

Question

Quizplus · Accepted Answer

According to the accounting principle of the matching concept, compensation expense for the stock option plan should be recognized over the period of service required to earn the option, which in this case is four years. Therefore, on December 31, 2014, which is one year after the option grant date, Watchtower should recognize compensation expense equal to the proportion of the total fair value of the option ($7 x 8,000 = $56,000) that has been earned for the first year of service (1/4 x $56,000 = $14,000). Hence, the correct answer is option B).

On January 1, 2014, Watchtower Corporation Granted Emma Freegross, Its