Question

On June 30, 2014, Yang Corporation granted compensatory stock options for 25,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $80,000. The options are exercisable beginning January 1, 2016, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2017.

On January 4, 2016, when the market price of the stock was $36 per share, all options for the 25,000 shares were exercised. The service period is for two years beginning January 1, 2014. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2014?
a. $80,000
b. $40,000
c. $18,750
d. $0

Answer 1

The compensation expense to be recorded for the stock options by Yang Corporation on December 31, 2014, is $40,000, which represents one year of service period allocated expense from the total $80,000 determined by the fair value option pricing model.

Step-by-step explanation:

The question pertains to the computation of compensation expense for the stock options granted by Yang Corporation. According to the fair value method of accounting for stock options, the total compensation expense determined to be $80,000 needs to be recognized over the service period. Given the service period for the options is two years beginning January 1, 2014, the compensation expense to be recorded by December 31, 2014, would be half of the total expense, since one year of service has elapsed. Therefore, the correct amount to be recognized as compensation expense on December 31, 2014, is $40,000 (option b).