On January 1, 2017, Orion Corp.granted an employee an option to purchase 5,000 of Orion's no par value common shares at $50 per share.The Black-Scholes option pricing model determined total compensation expense to be $220,000.The option became exercisable on December 31, 2018, after the employee completed two years of service.The market prices of Orion's shares were as follows: For calendar 2018, Orion should recognize compensation expense of
A)$ 0.
B)$ 50,000.
C)$110,000.
D)$250,000.

Question

On January 1, 2017, Orion Corp.granted an employee an option to purchase 5,000 of Orion's no par value common shares at $50 per share.The Black-Scholes option pricing model determined total compensation expense to be $220,000.The option became exercisable on December 31, 2018, after the employee completed two years of service.The market prices of Orion's shares were as follows:  For calendar 2018, Orion should recognize compensation expense of
A)$ 0. 
B)$ 50,000. 
C)$110,000. 
D)$250,000.

Quizplus · Accepted Answer

The compensation expense is recognized over the service period, which is two years in this case. The total compensation expense is $220,000, which is divided by the service period of two years to arrive at an annual expense of $110,000. Since the option became exercisable on December 31, 2018, the compensation expense recognized for 2018 will be half of the total annual expense, which is $55,000. However, since the market price of Orion's shares on December 31, 2018, was $60, which is higher than the exercise price of $50, no compensation expense needs to be recognized in 2018. Therefore, the answer is C, $110,000.