Question

A stock option plan with a positive fair value at grant date caused compensation expense of $50,000 per year to be recorded over the five-year service period. During the exercise period (two years), the stock price never exceeded the option price. Therefore, none of the options was exercised.Choose the correct statement about the accounting for these options.
A. the contributed capital increase from recording compensation expense is reversed, causing compensation expense to be reduced in the eighth year after grant.
B. The contributed capital increase from recording compensation expense is left intact.
C. The financial statements during the service period are retroactively restated by removing the compensation expense.
D. The compensation expense for later option grants is reduced by the amount recognized on the options that expired.

Answer 1

Answer: Option B

Explanation:

On the grant date the firm gives the value to the employee and also has mentioned that the option was a fair value during that period. Because of this the expiration of the stock options is not eligible for the reversal of compensation expense.

The expected value of the employee services is not considered for the valuation of the expense occurred for providing the stock option plans. The value is calculated based on the firm's givings to its employee.