On January 1, 2021, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2023, and expire on January 1, 2027. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. What amount should M recognize as compensation expense for 2021?A) $188,000.
B) $156,667.
C) $62,666.
D) $31,333.

D. $150,000

Explanation:

Stock option gives a right to employee to buy an amount of company stock at a given price in specified time period. It is charged as expense according to the fair value of the stock option every year until excercisable date.

Total Compensation Expense = Stock Options x Fair Value of Option

Total Compensation Expense = 90,000 x 5

Total Compensation Expense = $450,000

Compensation Expense = Total Compensation Expense / Number of years to excercise

Compensation Expense = $450,000 / 3 years = $150,000 per year

* Options Given are Inconsistent with data given.

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