On January 1, 2021, G Corp. granted stock options to key employees for the purchase of 82,000 shares of the company's common stock at $26 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, 2023, by the grantees still in the employ of the company. No options were terminated during 2021, 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 $32 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 $10. What amount should G charge to compensation expense for the year ended December 31, 2021

Question

Asa Gordon

Business

16 September, 19:55

On January 1, 2021, G Corp. granted stock options to key employees for the purchase of 82,000 shares of the company's common stock at $26 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, 2023, by the grantees still in the employ of the company. No options were terminated during 2021, 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 $32 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 $10. What amount should G charge to compensation expense for the year ended December 31, 2021

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Andrew Wilkins · Answer 1

The compensation expense for December 31, 2021 is $393,600

Explanation:

The compensation expense for December 2021 year ended can be determined using the below formula:

compensation expense=number of share options*fair value * (100%-% of forfeiture) / number of years of compensation

number of share options is 82000 shares

fair value of the option according to binomial pricing model is $10

% of forfeiture is 4% (from past experience)

the compensation is for a period of two years

compensation expense=82000*$10 * (100%-4%) / 2

=$820,000*96%/2

=$787200 / 2

=$393,600

The appropriate entries would be to debit compensation expense in 2021 with $393,600 while crediting paid-in capital-share options account