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
a. $0.
b. $1,800.
c. $3,600
d. $4,200

Answer 1

Reese Company should recognize compensation expense for 2015 on its books in the amount of $300.

Step-by-step explanation:

The compensation expense for 2015 that Reese Company should recognize on its books as a result of the option granted to Buchanan can be calculated by determining the fair value of the option at the grant date and allocating it over the service period. In this case, the fair value of the option is $3,600 and the service period is two years.

Since Buchanan exercised his option on September 1, 2015, and sold his shares on December 1, 2015, the compensation expense recognized for 2015 should be prorated based on the time he held the shares during that year. Using the fair value method, the compensation expense for 2015 should be calculated as follows: ($3,600 / 5 years) * [3 months / 12 months] = $300.

Therefore, as a result of the option granted to Buchanan, Reese should recognize compensation expense for 2015 on its books in the amount of $300.