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18 April, 19:04

On July 1, 2010, Ellison Company granted Sam Wine, an employee, an option to buy 400 shares of Ellison Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $1,800. Wine exercised his option on October 1, 2010 and sold his 400 shares on December 1, 2010. Quoted market prices of Ellison Co. stock in 2010 were:

July 1 $30 per share

October 1 $36 per share

December 1 $40 per share

The service period is for three years beginning January 1, 2010. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of

a. $1,800.

b. $600.

c. $450.

d. $0.

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  1. 18 April, 22:38
    0
    Ellison Company should recognize compensation expense on its books in the amount of $600

    Explanation:

    Solution

    The transaction in the books of Ellison Company during the period of July 1st 2010 to December 31st 2010

    On July 1st the share value was $30 * 400 = 12000

    On October 1st 2010 sold at $ 36 * 400 = 14400

    The gain on this transaction was = $2,400

    31st July 2010, less compensation expenses = $ 1,800

    The fair vale to be recorded as a gain = $ 600
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