Question

On July 1, 2014, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 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 $4,500. Wine exercised his option on October 1, 2014 and sold his 1,000 shares on December 1, 2014. Quoted market prices of Ellison Co. stock in 2014 were:

July 1 - $30 per share
October 1 - $36 per share
December 1 - $40 per share
The service period is for three years beginning January 1, 2014. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of
a. $4,500.
b. $1,500.
c. $1,125.
d. $0.

Answer 1

Ellison Company should recognize compensation expense in the amount of a) $4,500 for the stock option granted to Sam Wine.

Step-by-step explanation:

To determine the compensation expense for the stock option granted to Sam Wine, Ellison Company should recognize the fair value of the option on its books as compensation expense. In this case, the fair value of the option is determined to be $4,500. Since the option was exercised on October 1, 2014, and the stock was sold on December 1, 2014, the compensation expense should be recognized in the same year as the exercise date. Therefore, Ellison should recognize compensation expense in the amount of $4,500. So the correct answer is a. $4,500.