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    How much compensation expense should be recognized

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    On July 1, 2005 Austin Company granted Harry Ross, an employee, an option to buy 500 shares of Austin common stock at $30 per share. The option was exercisable for five years from the date of the grant. Ross exercised his option on October 1, 2005 and sold his shares on December 2, 2005. The quoted market prices for Austin common stock during the year were:

    July $30 per share
    October 1 $35 per share
    December $37 per share


    How much compensation expense should Austin recognize in 2005 as a result of the option granted to Ross?

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    Solution Preview

    Hi there,

    Here is some information for you regarding recognizing stock options:

    Stock options and stock-based incentives have, for some time, been widely accepted as a means of employee compensation at all levels of employment. The popularity of stock-based incentives is evidenced by the fact that in 2003 nearly 20 million US employees participated in more than 15,000 stock-based incentive plans, while in Canada, as early as the 1990s, 67% of the largest Canadian public companies granted their executives stock options.

    Understanding the accounting treatment of stock options and stock-based incentives, and the economic impact of such compensation on annual cash flow is important for merger and acquisition personnel, valuators, CFOs and most legal counsel for a variety of purposes. These include the valuation of a business for M&A or corporate finance purposes, setting executive compensation, quantifying damages in wrongful dismissal and the determination of net family values, among others.

    Until recently in Canada, no specific CICA Handbook rule existed with respect to the treatment of employee stock options for accounting purposes. Many companies did not report any impact on their financial statements from the issuance of employee ...