Question

On June 30, 2014, Norman Corporation granted compensatory stock options for 50,000 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $600,000. The options are exercisable beginning January 1, 2015, provided those key employees are still in Norman's employ at the time the options are exercised. The options expire on June 30, 2016. On January 4, 2015, when the market price of the stock was $42 per share, all 50,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2014 using the fair value method?

a. $0.
b. $240,000.
c. $300,000.
d. $600,000

Answer 1

The amount of compensation expense Norman Corporation should record for the calendar year 2014 using the fair value method is $600,000, as the total compensation value determined by the Black-Scholes model for the granted stock options is fully recognized in the year of the grant.

Step-by-step explanation:

The question addresses the accounting treatment of compensatory stock options using the fair value method. Specifically, it asks for the amount of compensation expense to be recorded in the year the stock options were granted, which is 2014. According to the information provided, Norman Corporation granted options for 50,000 shares and the options have a total compensation value of $600,000 determined by the Black-Scholes option pricing model. The correct recording of compensation expense would spread the total $600,000 expense over the vesting period of the options.

Since there's no information on a different vesting schedule, we assume the expense is recognized in full in 2014, the year of the grant, before the options become exercisable. Therefore, the correct amount of compensation expense to be recorded for the calendar year 2014 is $600,000.