Question

On January 1, 2015 Reese Company granted Jack Buchanan, an employee, an option to buy 300 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $3,600. Buchanan exercised his option on September 1, 2015, and sold his 100 shares on December 1, 2015. Quoted market prices of Reese Co. stock during 2015 were:

January 1 $40 per share
September 1 $48 per share
December 1 $54 per share

The service period is for two years beginning January 1, 2015. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2015 on its books in the amount of
Select one:
A. $0
B. $1,800
C. $3,600
D. $4,200.

Answer 1

The correct amount of compensation expense for Reese to recognize in 2015, using the fair value method, is $1,800, which represents one-half of the total compensation expense over the specified two-year service period.

Step-by-step explanation:

Considering the details provided for Reese Company and Jack Buchanan, the total compensation expense determined to be $3,600 is to be recognized over the service period of two years. Since the service period begins January 1, 2015, and one year of service would be completed by end of 2015, Reese should recognize half of the expense in the first year, as the expense is spread evenly over the service period.

Therefore, the correct amount of compensation expense to recognize for the year 2015 would be:
$3,600 total compensation expense ÷ 2 years = $1,800 for 2015.

As a consequence of this, the correct answer to the question provided is option B, $1,800.