Question

On June 30, 2008, Norman Corporation granted compensatory stock options for 30,000 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 $360,000. The options are exercisable beginning January 1, 2011, provided those key employees are still in Norman's employ at the time the options are exercised. The options expire on June 30, 2012.

On January 4, 2011, when the market price of the stock was $42 per share, all 30,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2010 using the fair value method?
a. $0.
b. $144,000.
c. $180,000.
d. $360,000.

Answer 1

The amount of compensation expense to be recorded by Norman Corporation for the calendar year 2010 is $144,000.

Step-by-step explanation:

The question asks what should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2010 using the fair value method. The total compensation expense of the stock options granted is $360,000.

Given that the options are exercisable over a period starting from January 1, 2011, the expense should be recognized over the service period leading up to the exercisability date. Assuming a straight-line method of expense recognition and disregarding any possible vesting conditions not mentioned in the question, the service period is from June 30, 2008, to January 1, 2011, which is two and a half years or 30 months in total.

Therefore, the annual expense is $360,000 / 2.5 years, which is $144,000 per year. However, since the question specifically asks for the expense recorded in 2010, the answer is:

b. $144,000.