Question

On January 1, 2021, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 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 $6,000. Wine exercised his option on October 1, 2021 and sold his 1,000 shares on December 1, 2021. Quoted market prices of Ellison Co. stock in 2021 were:

July 1 $30 per share
October 1 $36 per share
December 1 $40 per share

The service period is for three years beginning January 1, 2021. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense for 2021 on its books in the amount of:________

a. $6,000 21
b. $2,000
c. $1,500
d. $0

Answer 1

b. $2,000

Step-by-step explanation:

Using a fair value option pricing model, total compensation expense is determined to be $6,000.

The service period is for three years beginning January 1, 2021.

So, Ellison should recognize compensation expense for 2021 on its books in the amount of:

= $6,000 / 3 years

= $2,000.

As a result of the option granted to Wine, using the fair value method, Ellison should recognize $2,000 as compensation expense.