Question

On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 60,000 SARs. Current market prices of the stock are as follows:

January 1, 2010 $35 per share
December 31, 2010 38 per share
December 31, 2011 30 per share
December 31, 2012 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2010.


What amount of compensation expense should Korsak recognize for the year ended December 31, 2010?
a. $180,000
b. $270,000
c. $225,000
d. $1,080,000

Answer 1

Korsak, Inc. should recognize a compensation expense of $180,000 for the year ended December 31, 2010.

Step-by-step explanation:

The compensation expense that Korsak, Inc. should recognize for the year ended December 31, 2010 can be calculated by finding the difference between the market price of the common stock and the pre-established price of $20 on 60,000 stock appreciation rights (SARs). To calculate the compensation expense for the year ended December 31, 2010, we need to determine the number of SARs that were exercised during that year. The number of SARs exercised is calculated by taking the difference between the market price of the common stock on January 1, 2010 ($35) and the pre-established price of $20, and multiplying it by the number of SARs (60,000). Therefore, the compensation expense for the year ended December 31, 2010 is $900,000 ($15 x 60,000). Hence, the correct answer is a. $180,000.