Question

In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2014. 90,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:

December 31, 2015 $46 per share, December 31, 2016 51 per share, The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $900,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2015 under the fair value method?
a. $450,000.
b. $900,000.
c. $990,000.
d. $3,150,000

Answer 1

The compensation expense Jensen Corporation should recognize for the year ended December 31, 2015, is $450,000, which is half of the total $900,000 expense determined by the Black-Scholes model for the two-year service period of the incentive stock options.

Step-by-step explanation:

The question involves determining the compensation expense Jensen Corporation should recognize for the year ended December 31, 2015, under the fair value method for the incentive stock options granted to executives. Given the total compensation expense determined by the Black-Scholes option pricing model is $900,000, and that the compensation is for services to be rendered over a two-year period starting January 1, 2015, the compensation expense should be recognized evenly over that period. Therefore, for the year ended December 31, 2015, the amount of compensation expense recognized should be half of $900,000, which is $450,000.