Question

On January 1, 2018, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2020, and expire on January 1, 2024. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. What amount should M recognize as compensation expense for 2018?

Answer 1

Answer: $120,000

Explanation:

Given that,

Company granted = 90,000 stock options

common stock = $12

one share = $1 par common stock = $12

Fair value of the option = $5

Total Value of the option = $90,000 × $5 = $450,000

$450,000 × 90% = $405,000

$450,000\times\frac{2}{3}$   (2 out of 3 years)

        = $270,000

$\frac{450,000}{3}$

= $150,000

Therefore,

compensation expense for 2018 =  $270,000 - $150,000

                                                       = $120,000