Question

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 440,000 executive stock options permitting executives to buy 440,000 shares of Pastner stock for $36 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	%	$	3.70
Dec. 31, 2019		25	%	$	4.20
Dec. 31, 2020		25	%	$	4.50
Dec. 31, 2021		25	%	$	5.20

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.

Answer 1

Solution :

Req 1

compensation Expense related to options to be recorded each year.

If pastner allocates the expense to each of the four groups seperately.

Vesting Date	2018	2019	2020	2021	Total
31 Dec 2018	$ 407,000				$ 407,000
31 Dec 2019	$ 231,000	$ 231,000			$ 462,000
31 Dec 2020	$ 165,000	$ 165,000	$ 165,000		$ 495,000
31 Dec 2021	$ 143,000	$ 143,000	$ 143,000	$ 143,000	$ 572,000
Total	$ 946,000	$ 539,000	$ 308,000	$ 143,000	$ 1,936,000

Working note :

Calculation of compensation expense on each vesting date :

vesting date	Vesting % A	number of shares vested B ( 440,000 * 25 % )	fair value per option C	compensation expense ( B * C )
31 Dec 2018	25%	110,000	$ 3.70	$ 407,000
31 Dec 2019	25%	110,000	$ 4.20	$ 462,000
31 Dec 2020	25%	110,000	$ 4.50	$ 495,000
31 Dec 2021	25%	110,000	$ 5.20	$ 572,000
Total		440,000		$ 1,936,000

Req 2

compensation Expense related to options to be recorded each year.

If pastner uses straight line method to allocate the Total compensation Cost.:

2018	2019	2020	2021	Total
$ 484,000	$ 484,000	$ 484,000	$ 484,000	$ 1,936,000

working note :

Total compensation cost =$1,936,000

Cost each year if straight line method is used = $ 1,936,000 / 4 = $ 484,000

Please upvote. Thanx.