In: Accounting
JBL Aircraft manufactures and distributes aircraft parts and
supplies. Employees are offered a variety of share-based
compensation plans. Under its nonqualified stock option plan, JBL
granted options to key officers on January 1, 2018. The options
permit holders to acquire 5 million of the company's $1 par common
shares for $31 within the next six years, but not before January 1,
2021 (the vesting date). The market price of the shares on the date
of grant is $35 per share. The fair value of the 5 million options,
estimated by an appropriate option pricing model, is $6 per option.
Because the plan does not qualify as an incentive plan, JBL will
receive a tax deduction upon exercise of the options equal to the
excess of the market price at exercise over the exercise price. The
tax rate is 40%.
Determine the total compensation cost pertaining to the incentive
stock option plan.
Determination of total compensation cost |
Total compensation cost pertaining to
the incentive stock option plan = Estimated Fair value of option x Options Granted = $6 per option x 5 million = $30 million or $30,000,000 |
Total compensation cost = $30 million or $30,000,000 |