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 480,000 executive stock options permitting executives to buy 480,000 shares of Pastner stock for $43 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	%	$	4.40
Dec. 31, 2019		25	%	$	4.80
Dec. 31, 2020		25	%	$	5.40
Dec. 31, 2021		25	%	$	6.40

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

Answer 1.
We treat each individual vesting date as a separate award:
Vesting Date	Number of Shares - Vesting	Fair Value - Per Option	Compensation Cost
31-Dec-18	120,000	4.40	528,000.00
31-Dec-19	120,000	4.80	576,000.00
31-Dec-20	120,000	5.40	648,000.00
31-Dec-21	120,000	6.40	768,000.00
Total			2,520,000.00
Shares Vesting at	Compensation Expenses Recorded in
	2018	2019	2020	2021
31-Dec-18	528,000.00
31-Dec-19	288,000.00	288,000.00
31-Dec-20	216,000.00	216,000.00	216,000.00
31-Dec-21	192,000.00	192,000.00	192,000.00	192,000.00
Total				2,520,000.00
Answer 2.
	2018	2019	2020	2021	Total
Compensation Expense	630,000.00	630,000.00	630,000.00	630,000.00	2,520,000.00