Option-Pricing Model Assignment
3. Watt Corp. on January 1, 20×1, granted stock options for 20,000 shares of its $10 par value common stock to its key employees. The price of the common stock on that date was valued at $23 per share and the option price was $20. The Black-Scholes option-pricing model determines the total compensation expense to be $120,000. The options are exercisable beginning January 1, 20×4, providing those key- employees are still in the employ of Watt at the time the options are exercised. The options expire on January 1, 20×5.
On January 1, 20×4, when the price of the stock was $29 per share, all 20,000 options were exercised. The amount of compensation expense Watt should record for 20×3 under the fair value method and intrinsic value, respectively is
| Fair Value Method | Intrinsic Method | |
| a. | $〇 | $20,000 |
| b. | $20,000 | $60,000 |
| c. | $40,000 | $20,000 |
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