Question
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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