Question

On January 1, 2011, Evans Company granted Tim Telfer, an employee, an option to buy 1,000 shares of Evans Co. stock for $25 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 $7,500. Telfer exercised his option on September 1, 2011, and sold his 1,000 shares on December 1, 2011. Quoted market prices of Evans Co. stock during 2011 were

January 1 $25 per share
September 1 $30 per share
December 1 $34 per share
The service period is for three years beginning January 1, 2011. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2011 on its books in the amount of
a. $9,000.
b. $7,500.
c. $2,500.
d. $1,500.

Answer 1

Evans should recognize compensation expense for 2011 in the amount of $2,500.

Step-by-step explanation:

Under the fair value method, compensation expense for stock options is calculated based on the fair value of the options on the grant date. In this case, the total fair value of the options granted to Telfer is $7,500. Since the service period is for three years, the compensation expense to be recognized each year is $7,500 divided by three, which equals $2,500. Therefore, Evans should recognize compensation expense for 2011 in the amount of $2,500.