Martin Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During 2013, employees purchased 8 million shares; during this same period, the shares had a market price of $15 per share at the end of the year. Martin's 2013 pretax earnings will be reduced by:
A)$0.
B)$12 million.
C)$108 million.
D)$120 million.

Question

Quizplus · Accepted Answer

The discount given to employees is considered compensation expense. The discount is 10% of the market price, which is $1.50 per share ($15 x 10%). For 8 million shares, the total compensation expense is $12 million (8 million x $1.50).