On January 1, Year 1, Tec Corporation grants share appreciation rights to its CEO. Under the plan, the CEO will receive cash for the difference between the quoted market price and a $40 option price for 2,000 shares of the company's common stock on the exercise date. The service period is 4 years. The fair value per SAR is $18 at the end of Year 1 and $30 at the end of Year 2.

What is the compensation expense for Year 2?

A. $11,000
B. $9,000
C. $30,000
D. $39,000

The compensation expense for year 2 the ceo will receive cash would be B. $9,000.

The fair value of the share appreciation rights (SARs) at the end of year 1 was $18 for each SAR, and the fair value at the end of year 2 was $30 for each SAR. Since the CEO was granted 2,000 SARs, the total fair value of the SARs at the end of year 1 was 2,000 x $18 = $36,000, and the total fair value of the SARs at the end of year 2 was 2,000 x $30 = $60,000.

Therefore, the compensation expense for year 2 is the difference between the fair value of the SARs at the end of year 1 ($36,000) and the fair value of the SARs at the end of year 2 ($60,000), which is $60,000 - $36,000 = $24,000. Since the exercise price was $40 per SAR, the compensation expense is $24,000 - (2,000 x $40) = $24,000 - $80,000 = $9,000.

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