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. If unexpected turnover in 2019 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2019? Group of answer choices $150,000. $30,000. $60,000. $120,000.

Answer 1

Answer:

$120,000

Explanation:

Calculation to determine What amount should M recognize as compensation expense for 2019

First step is to calculate the Value of the option using this formula

Value of the option = Stock options × Fair value of the options

Let plug in the formula

Value of the option=90,000*$5

Value of the option=$450,000

Now let determine compensation expense for 2019

2019 Compensation expense=[($450,000*(100%-10%))*2/3]-$450,000/3 years

2019 Compensation expense=[($450,000*90%)*2/3]-$150,000

2019 Compensation expense=($405,000*2/3)-$150,000

2019 Compensation expense=$270,000-$150,000

2019 Compensation expense=$120,000

Therefore The amount that M recognize should recognize as compensation expense for 2019 is $120,000