[jessanqi]

I’m confused with these two question, does the intrinsic value and deferred compensation expense are the same thing???

Can anyone kindly help???

Thanks!!!

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

A. $50
B. $100
C. $200
D. $900

Explanation
The correct answer is B. Intrinsic value is the difference between an underlying stock’s market price and its exercise price, times the number of shares that can be purchased. You take the fair market value of the $10 per share, minus the exercise price of $9 per share, resulting in a difference of $1 per share, times the number of shares in the option of 100. This gives an intrinsic value of $100. If the difference in the market price and the exercise price is negative, intrinsic value is given a zero value because it can never be negative.

On January 1, 20X5, Baxter Corporation granted John Elliot, the president, an option to purchase 10,000 shares of Baxter’s $20 par value common stock at $30 per share, The option is intended as additional compensation to Elliot for the next two years. The option is exercisable within a four-year period beginning January 1, 20X7. The market price of Baxter’s common stock, with similar terms and conditions, was $35 per share on January 1, 20X5, and $37 per share on December 31, 20X5. As a result of the stock option, Baxter should charge compensation expense in 20X5 of

A. $25,000
B. $35,000
C. $50,000
D. $75,000

Explanation
The correct answer is A. The compensation expense in this stock option plan is measured by the difference between the market price and the exercise price on the date the grant is made. In this situation, on January 1, 20X5, the common stock had a market price of $35 per share, with similar terms and conditions, while the exercise price to Elliot is $30 per share. Therefore, the total compensation expense over the period benefitted is $50,000 (10,000 shares × $5). Since the option is intended as additional compensation for two years, there would be additional compensation expense of $25,000 in 20X5 and $25,000 in 20X6. The journal entries are:
1/1/X5:

Debit: Deferred compensation expense $50,000
Credit: Paid in capital stock options
$50,000

12/31/X5:

Debit: Compensation expense $25,000
Credit: Deferred compensation expense
$25,000

12/31/X6:

Debit: Compensation expense $25,000
Credit: Deferred compensation expense
$25,000

[jessanqi]

anyone can help??

[jeff]

If you would, please post questions like this in the FAR study group sticked above…it avoids the front page of the forum from being single-topic, exam-specific posts.

Much appreciated,

jeff

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Author]

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