Refer to the information in E 8-24. If those holding stock options can purchase a share of stock for $48 and the market value of a share of stock on January 1, 2012, is $50, how can the option to purchase the share be worth $11? What factors would cause the option to be worth more than $2 ($50 – $48)? Remember, the options cannot be exercised until the end of the year.

Data from E 8-24

On January 1, 2012, Magily Company established a stock option plan for its senior employees. A total of 60,000 options were granted that permit employees to purchase 60,000 shares of stock at $48 per share. Each option had a fair value of $11 on the date the options were granted. The market price for Magily stock on January 1, 2012, was $50. The employees are required to remain with Magily Company for the entire year of 2012 in order to be able to exercise these options. Compute the total amount of compensation expense to be associated with these options under the fair value method.