Answer:
B. $12 million
Explanation:
Martin Corp. has offered shares to it's employees at a 10% discount. The amount of discount given on shares will be treated as a compensation expense which is the amount by which Martin's 2013 pretax earnings will be reduced by.
One important thing to note here is, employees upon purchasing of Martin's shares will not be given salaries which means Martin would save cash through the issuance of shares that would have been given to the employees in terms of salaries.
The amount of cash saved is as follows:
cash = $15×8 million ×90%
cash = $108 million.
Since shares are issued at a discount, the discount is compensation expense as mentioned earlier, the compensation discount is as follows;
compensation discount = $15 × 8 million×10%
compensation discount = $12 million
The journal entry would be:
Cash Dr $108
compensation expense Dr $12
equity Cr $120
