On June 30, 2015, Kinshasa Corp.granted stock options for 30,000 of its no par value common shares to key employees, at an option price of $36.On that date, the market price of the common shares was $32.The Black-Scholes option pricing model determined total compensation expense to be $720,000.The options are exercisable beginning January 1, 2018, providing the key employees are still employed by Kinshasa at the time the options are exercised.The options expire on June 30, 2019.On January 2, 2018, when the market price of the shares was $42, all 30,000 options were exercised.The amount of compensation expense Kinshasa should have recorded for calendar 2017 is
A)$120,000.
B)$288,000.
C)$360,000.
D)$720,000.

Question

Quizplus · Accepted Answer

The compensation expense should be recognized for the period between the grant date and the date when the options become exercisable, which is January 1, 2018. Since the options were granted on June 30, 2015, and become exercisable on January 1, 2018, the vesting period is 2.5 years (30 months). Therefore, the annual compensation expense is $720,000/2.5 years = $288,000 per year. For the calendar year 2017, the compensation expense would be 1.5 years x $288,000 = $432,000. However, since none of the options were exercised during 2017, the compensation expense to be recorded in 2017 would be the portion of the total expense for the period from the grant date to December 31, 2016, which is 18/30 x $288,000 = $172,800.