Question

On January 1, 2011, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2013, by the grantees still in the employ of the company. No options were terminated during 2011, but the company does have an experience of 20% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the Binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2011

Answer 1

The amount should G charge to compensation expense for the year ended December 31, 2011 is $320,000

Step-by-step explanation:

In order to calculate the amount should G charge to compensation expense for the year ended December 31, 2011 we would have to calculate the following formula:

amount should G charge to compensation expense for the year ended December 31, 2011=Total compensation/2

Note: company does have an experience of 20% forfeitures over the life of the stock options, therefore, 100%-20%=80%

Total compensation= 80,000 options × $10 × 80%

Total compensation= $640,000

amount should G charge to compensation expense for the year ended December 31, 2011=$640,000/2

amount should G charge to compensation expense for the year ended December 31, 2011=$320,000