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    As compensation for helping start the import business, I have been offered 100 shares of stock under a stock option plan. I exercised these options recently at $45 when the market price was $60. I was interested in how the stock option program will affect my Corporation. Include the following in your answer:

    ? Discuss the two GAAP accounting methods for these types of entities and what the difference is for each method.
    ? What the amount of compensation is for the options exercised? Be sure to explain how I can arrive at this value.
    ? How do I record this gain on my books?

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    Solution Preview

    (a)
    The following are the two GAAP accounting methods that are usually used:

    The Intrinsic Value Method. The intrinsic value of a stock option on the grant date is measured by the difference between the fair market value of the stock on the grant date and the exercise price (strike price) under the stock option. Compensation cost to be recognized in connection with the granting of stock ...

    Solution Summary

    The solution answers the following questions about the stock option program

    ? Discuss the two GAAP accounting methods for these types of entities and what the difference is for each method.
    ? What the amount of compensation is for the options exercised? Be sure to explain how I can arrive at this value.
    ? How do I record this gain on my books?

    $2.49

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