Martin corp. permits any of its employees to buy shares directly from the company through payroll deduction. there are no brokerage fees and shares can be purchased at a 10% discount.
during 2013, employees purchased 8 million shares; during this same period, the shares had a market price of $15 per share at the end of the year.

martin's 2013 pretax earnings will be reduced by: a. $0.b. $12 million. c. $108 million. d. $120 million.

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  

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