Question

Darlington Inc., permits any of its employees to buy shares directly from the company. There are no brokerage fees and shares can be purchased at a 10% discount. During May, employees purchased 14,000 shares at a time when the market price of the shares was $10 per share. Darlington will record compensation expense associated with the May purchases of:

a)$ 195,000.

b)$ 22,150.

c)$ 21,450.

d)$ 0.

Answer 1

(c) $ 21,450

Step-by-step explanation:

Computation of the compensation expense associatd with the may purchases using intrinsic value method.We have,

Market price = $ 15 per share

Exercise price = 15 - ( 15*11%) = 15 - 1.65 = $ 13.35

Number of shares = 13,000

Compensation expenses = Number of shares ( Market price - Exercise price)

Compensation expenses = 13,000 ( 15 - 13.35) = $ 21,450

Hence, KL will record compensation expense associated with the May purchases is $ 21,450