On January 1, 2013, D Corp. granted an employee an option to purchase 6,000 shares of D's $5 par common stock at $20 per share. The options became exercisable on December 31, 2014, after the employee completed two years of service. The option was exercised on January 10, 2015. The market prices of D's stock were as follows: January 1, 2013, $30; December 31, 2014, $50; and January 10, 2015, $45. An option pricing model estimated the value of the options at $8 each on the grant date. For 2013, D should recognize compensation expense of:
A)$0.
B)$24,000.
C)$30,000.
D)$60,000.

Question

Quizplus · Accepted Answer

The correct answer is B because the compensation expense is calculated as the difference between the market price of the stock on the grant date and the exercise price, multiplied by the number of options granted. In this case, the compensation expense is $30 - $20 = $10 per share, multiplied by 6,000 shares, which equals $60,000. However, the company can only recognize compensation expense up to the amount of the fair value of the options on the grant date, which is $8 per share. Therefore, the compensation expense that D should recognize for 2013 is $8 per share multiplied by 6,000 shares, which equals $24,000.