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In: Accounting

Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive...

Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company issued 480,000 executive stock options permitting executives to buy 480,000 shares of Pastner stock for $40 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2018 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2018, as follows:

Vesting
Date
Amount
Vesting
Fair Value
per Option
Dec. 31, 2018 25 % $ 4.10
Dec. 31, 2019 25 % $ 4.60
Dec. 31, 2020 25 % $ 5.40
Dec. 31, 2021 25 % $ 5.60


Required:
1. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately.
2. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner uses the straight-line method to allocate the total compensation cost.
  

Solutions

Expert Solution

Answer :

1.

Shares Compensation expenses recorded in
Vestiung at 2018 2019 2020 2021
Dec 31,2018 $ 492000
Dec 31, 2019 $ 276000 $ 276000
Dec 31, 2020 $ 216000 $ 216000 $ 216000
Dec 31 ,2021 $ 168000 $ 168000 $ 168000 $ 168000
$ 1152000 $ 660000 $ 384000 $ 168000
  Total $ 2364000

Working note - 1

Computation of Compensation expenses each year

Vesting date Number of vesting Fair value of option Compensation cost
dec 31,2018 120000 $ 4.10 $ 492000
dec 31, 2019 120000 $ 4.60 $ 552000
dec 31,2020 120000 $ 5.40 $ 648000
dec 31,2021 120000 $ 5.60 $ 672000
$ 2364000

Note -1

Company should at least recognize the amount vested by the due date.

1. $ 1152000 vested in 2018 Exceeds the $ 492000 vested.

2. $ 1812000( $ 1152000+ $ 660000) Recognized by 2019 exceeds the $ 1044000 ( $ 492000+ $ 552000) Vested by the same time.

3. $ 2196000 ( $ 1152000 + $ 660000+ $ 384000) Recognised by 2020 Exceeds the $ 1692000( $ 492000+ $ 552000+ $ 648000) vested by the same time.

2.

2018 2019 2020 2021 Total
Compensation Expenses $ 591000 $ 591000 $ 591000 $ 591000 $ 2364000

Working note -2

Compensation expenses allocated to each year by SLM

= $ 2364000/4 = $ 591000


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