On January 1,2016,D Corp.granted an employee an option to purchase 6,000 shares of D's $5 par common stock at $20 per share.The options became exercisable on December 31,2017,after the employee completed two years of service.The option was exercised on January 10,2018.The market prices of D's stock were as follows: January 1,2016,$30;December 31,2017,$50;and January 10,2018,$45.An option pricing model estimated the value of the options at $8 each on the grant date.For 2016,D should recognize compensation expense of:
A)$ 0.
B)$24,000.
C)$30,000.
D)$60,000.

Question

Quizplus · Accepted Answer

The compensation expense to be recognized is calculated as the difference between the option's fair value and the exercise price, multiplied by the number of options, and divided by the vesting period. Here, the fair value of the options is $8, the exercise price is $20 and the vesting period is two years. Therefore, the compensation expense to be recognized for 2016 is ($8 - $20) x 6,000 / 2 = $24,000. The market price of D's stock on the grant date is not relevant for the calculation of compensation expense.