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 $24 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 4% forfeitures over the life of the stock options. The market price of the common stock was $30 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 $8. What amount should G charge to compensation expense for the year ended December 31, 2013?

Explanation / Answer

As the options are intended to compensate employees for the next two years, the compensation expense will be divided equally between 2013 and 2014.

Value of Options = 89000 * 8 * 96% (Assuming that 4% expire)

= 683,520

Therefore compensation expense to be recognised for 2013 = 683520/2 = $341,760

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