Question

On January 1, 2010, Sharp Corp. granted an employee an option to purchase 6,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2011, after the employee completed two years of service. The market prices of Sharp's stock were as follows:

January 1, 2010 $30
December 31, 2011 50
For 2011, should recognize compensation expense under the fair value method of
a. $90,000.
b. $30,000.
c. $70,000.
d. $0.

Answer 1

To calculate the compensation expense for 2011, we need to determine the fair value of the options on December 31, 2011, and allocate the total compensation expense over the vesting period. The correct answer is $70,000.

Step-by-step explanation:

To determine the compensation expense for 2011 using the fair value method, we need to calculate the fair value of the options on December 31, 2011, which is the date the options became exercisable. The fair value is the difference between the market price of the stock on that date ($50) and the exercise price of the option ($20), multiplied by the number of shares (6,000). So, the fair value of the options on December 31, 2011, is ($50 - $20) * 6,000 = $180,000.

Since the total compensation expense determined by the Black-Scholes model is $140,000, we need to allocate this expense over the vesting period, which is two years in this case. So, the compensation expense for 2011 would be $140,000 / 2 = $70,000.

Therefore, the correct answer is c. $70,000.