Question

Weiser Corp. on January 1, 2007, granted stock options for 40,000 shares of its $10 par value common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $240,000. The options are exercisable beginning January 1, 2010, provided those key employees are still in Weiser's employ at the time the options are exercised. The options expire on January 1, 2011.

On January 1, 2010, when the market price of the stock was $29 per share, all 40,000 options were exercised. The amount of compensation expense Weiser should record for 2009 under the fair value method is
a. $0.
b. $40,000.
c. $80,000.
d. $120,000.

Answer 1

The compensation expense Weiser should record for 2009 is $80,000. This is the last portion of the total $240,000 compensation expense recognized over the three-year vesting period as determined by the Black-Scholes model.

Step-by-step explanation:

The amount of compensation expense Weiser should record for 2009 under the fair value method is $80,000. Since the total compensation expense over the vesting period determined by the Black-Scholes option pricing model is $240,000 and the options vest evenly over a three-year period from January 1, 2007, to January 1, 2010, Weiser should recognize $80,000 each year ($240,000 total expense / 3 years).

In 2009, as it is the third year of the vesting period, Weiser would record the final third of the expense. If all options are exercised on January 1, 2010, it confirms that the conditions for the expense recognition over the service period were met, but as it is after the 2009 accounting period, it does not impact the 2009 compensation expense.