Question

On June 30, 2010, Yang Corporation granted compensatory stock options for 20,000 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 $64,000. The options are exercisable beginning January 1, 2012, 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, 2013.

On January 4, 2012, when the market price of the stock was $36 per share, all options for the 20,000 shares were exercised. The service period is for two years beginning January 1, 2010. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2010?
a. $64,000
b. $32,000
c. $15,000
d. $0

Answer 1

None of the options is correct. The compensation expense recorded by Yang Corporation for these options on December 31, 2010, should be $8,000.

Step-by-step explanation:

To calculate the compensation expense recorded by Yang Corporation for the options on December 31, 2010, we need to consider the fair value of the options granted and the service period. The fair value option pricing model values the compensation expense at $64,000, which is the total expense to be recognized over the service period of two years. Since the options were granted on June 30, 2010, and the service period starts from January 1, 2010, the portion of the service period that has already elapsed by December 31, 2010, is 6 months (from January 1 to June 30, 2010).

To calculate the compensation expense for the elapsed portion of the service period, we need to divide the total compensation expense by the total service period and then multiply it by the elapsed portion. Therefore, the compensation expense recorded by Yang Corporation for these options on December 31, 2010, would be:

Compensation Expense = ($64,000 / 2 years) * (6 months / 12 months) = $16,000 * 0.5 = $<<64000/2*6/12=16,000*0.5=8000>>8,000