Question

On January 1, 2016, Webber Company granted 56,300 stock options to certain executives. The options are exercisable no sooner than December 31, 2018, and expire on January 1, 2022. Each option can be exercised to acquire one share of $1 par common stock for $8. An option-pricing model estimates the fair value of the options to be $3 on the date of grant.

If unexpected turnover in 2017 caused the company to estimate that 10% of the options would be forfeited, what amount should Webber recognize as compensation expense for 2018?

Answer 1

Solution:
	Fair value of stock on grant date = $3
	Options granted = 56,300
	vesting period = 3 years (2016-2018)
	Compensation expense for 2016 = 56,300*$3/3 years =$56,300
	Compensation expense for 2017 = [($56,300-10%*56,300)*$3]*2/3 = $101,340
	= $101,340 - $56,300
	= $45,040
	Compensation expense for 2018 = (50,670*$3)*3/3 =$152,010
	= $152,010-$45,040-$56,300
	= $50,670
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