On January 1, 2018, M Company granted 95,000 stock options to certain executives. The options are...

On January 1, 2018, M Company granted 95,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2020, and expire on January 1, 2024. Each option can be exercised to acquire one share of $1 par common stock for $10. An option-pricing model estimates the fair value of the options to be $4 on the date of grant.

If unexpected turnover in 2019 caused the company to estimate that 15% of the options would be forfeited, what amount should M recognize as compensation expense for 2019?

Expert Solution

Answer:

Vesting period = Date of Grant of Stock Option to Option exercised
= Jan 1 ,2008 to Dec. 31, 2020
= 3 years

Vesting period = 3 years , Fair value - $4

Annual compensation expense in 2018   = (Number of stock options x Fair value) / Vesting period
                                                                                  =   95,000 x $4 / 3
                                                                                  = $126,667

Number of stock options after forfeiture = (95,000 (-) 15%) = 80,750

Total compensation expense   =   Number of stock options after forfeiture x Fair value
                                                               = 80,750 x $4
                                                               = $323,000

Cumulative compensation expense for 2019 = $323,000 x 2 years / 3 years
= $215,333
Compensation expense in 2018 = $126,667

Compensation expense in 2019 = $215,333 (-) $126,667
= $88,666

Amount should M recognize as compensation expense for 2019 = $88,666

ekkarill92 answered 2 years ago

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