In connection with a stock option plan for the benefit of key
employees, Ward Corp. intends to distribute treasury shares
when the options are exercised. These shares were bought in
year 1 at $42 per share. On January 1, year 2, Ward granted stock
options for 10,000 shares at $38 per share as additional compensation
for services to be rendered over the next three years. The
options are exercisable during a four-year period beginning January
1, year 5, by grantees still employed by Ward. Market price of
Ward’s stock was $47 per share at the grant date. The fair value
of a similar stock option with the same terms was $12 at the grant
date. No stock options were terminated during year 2. In Ward’s
December 31, year 2 income statement, what amount should be
reported as compensation expense pertaining to the options?