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In 2017, an employee was granted 5,000 options to purchase shares of stock with an exercise...

In 2017, an employee was granted 5,000 options to purchase shares of stock with an exercise price of $16.00 per share. In 2017, stock option expense was recorded in the after-tax amount of $2.50 per share. In 2020, when the shares were trading at $20.00 per share, the options were exercised. The firm’s marginal tax rate is 22%.

According to GAAP, the difference between the stock option expense originally recorded in the financial statements and the true cost of the stock options to the company is recognized in the income statement in which period:

a. none of the choices listed are correct

b. 2020

c. 2021

d. 2017

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Answer #1

Answer - b. 2020

  • Employees compensation expense should be recognised in the year in which options are granted.In this case options granted in the year 2017.
  • the dfference between the stock option expense originally recorded in the financial statements and the true cost of the stock options to the company is recognized in the income statement in the period in which options are exercised.In this case options are excercised in the year 2020.Therefore in the same year 2020 the difference should be adjusted.
  • Employees compensation expense is expense resulting from granting stock options to the employees.
  • Employees compensation expense or stock based compensation is difference between Market price on date of granting options and Excercise price
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