Question

Knowledge Check 01
At January 1, Year 1, Edwards Company issued 10,000 stock options permitting employees to buy 10,000 shares of stock for $50 per share. The vesting schedule (graded-vesting) and value of the options that vest over the 3-year period is estimated at January 1, Year 1, as set forth in the following table.

Vesting Date	Amount Vesting				Fair Value per Option
Dec. 31, Year 1		10	%		$	2
Dec. 31, Year 2		30	%		$	3
Dec. 31, Year 3		60	%		$	4

What is the compensation cost for Year 1 relating to these stock options? (Do not use the straight-line method.)

Answer 1

Answer:

Value of Compensation Cost - Dec. 31, Year 1        = Options issued x Amount Vesting x Fair Value per Option x 1 / 1        =   10,000 x 10% x $ 2x 1/1        = $ 2,000

Value of Compensation Cost - Dec. 31, Year 2        = Options issued x Amount Vesting x Fair Value per Option x 1 / 1        =   10,000 x 30% x $ 3 x 1/2        = $ 4,500

Value of Compensation Cost - Dec. 31, Year 3        = Options issued x Amount Vesting x Fair Value per Option x 1 / 1        =   10,000 x 60% x $ 4x 1/3        = $ $ 8,000

Compensation cost for Year 1 relating to these stock options                     = $ 2,000 + $ 4,500 + $ 8,000                     = $ 14,500

Compensation cost for Year 1 relating to these stock options = $ 14,500