Watt Corp. on January 1, 20x1, granted stock options for 20,000 shares of its $1
ID: 2415835 • Letter: W
Question
Watt Corp. on January 1, 20x1, granted stock options for 20,000 shares of its $10 par value common stock to its key employees. The price of the common stock on that date was valued at $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be$120,000. The options are exercisable begnning January 1, 20x4, providing those key empoyees are still in the employ of Watt at the time the options are exercised. The options expire on January 1, 20x5.
On January 1, 20x4, when the price of the stock was $29 per share, all 20,000 options were exercised. The amount of compensation exense Watt should record fo 20x3 under the fair value method (FVM) and intrinsic value method (IVM), respectively is
A) FVM= $0. IVM= $20,000.
B) FVM= $20,000. IVM= $60,000.
C) FVM= $40,000. IVM= $20,000.
D)FVM= $60,000. IVM= $60,000.
Explanation / Answer
Answer)
C) FVM= $40,000. IVM= $20,000.
Fair Value Method Compensation expenses =$120,000
Compensation Expenses Charged Each year =120000/3 = $40,000
Intrinsic Value Method Compensation Expenses = (23-20)*20000 = $60,000
Compensation Expenses Charged Each year =60000/3 = $20,000
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