Question

On January 1, 2015, Evans Company granted Tim Telfer, an employee, an option to buy 3,000 shares of Evans Co. stock for $25 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 $22,500. Telfer exercised his option on September 1, 2015, and sold his 1,000 shares on December 1, 2015. Quoted market prices of Evans Co. stock during 2015 were January 1 $25 per share, September 1 $30 per share, December 1 $34 per share, The service period is for three years beginning January 1, 2015. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2015 on its books in the amount of

a. $27,000.
b. $22,500.
c. $ 7,500.
d. $ 4,500

Answer 1

The correct answer is c) $7,500. Evans Company should recognize compensation expense for 2015 by dividing the total compensation expense by the service period, which results in $7,500 for that year.

Step-by-step explanation:

The student has inquired about the compensation expense that Evans Company should recognize for the year 2015 after granting an option to an employee, Tim Telfer. Since the options are exercisable for a period of five years and the service period is three years, starting from January 1, 2015, the compensation expense is to be recognized over the service period. The total compensation expense determined using a fair value option pricing model is $22,500. This expense should be recognized evenly over the three years, so Evans should recognize one-third of $22,500 in 2015.

Therefore, the compensation expense for 2015 is:

$22,500 total compensation expense / 3 years = $7,500 per year.

Option c) $7,500 is the correct amount of compensation expense that Evans Company should recognize for the year 2015.