On January 1, 2013, G Corp. granted stock options to key employees for the purch

Question

On January 1, 2013, G Corp. granted stock options to key employees for the purchase of 89,000 shares of the company's common stock at $22 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2015, by the grantees still in the employ of the company. No options were terminated during 2013, but the company does have an experience of 5% forfeitures over the life of the stock options. The market price of the common stock was $28 per share at the date of the grant. G Corp. used the Binomial pricing model and estimated the fair value of each of the options at $9. What amount should G charge to compensation expense for the year ended December 31, 2013?

A) $760,950.

B) $400,500.

C) $801,000.

D) $380,475.

Explanation / Answer

Ans. B $ 400,500

Calculation of Compensation Expenses for 2013:

Total Value of Option = 89,000 x 9 = $ 801,000

Vesting Period = 2 Years

Amount recognize as compensation expense each year = Total value / Vesting Period

= 801,000 / 2 = $ 400,500

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