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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, 2021, the company issued 320,000 executive stock options permitting executives to buy 320,000 shares of Pastner stock for $44 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2021 (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, 2021, as follows:

Vesting Date Amount
Vesting
Fair Value
per Option
Dec. 31, 2021 25 % $ 4.50
Dec. 31, 2022 25 % $ 5.00
Dec. 31, 2023 25 % $ 5.40
Dec. 31, 2024 25 % $ 6.00


Required:
1. Determine the compensation expense related to the options to be recorded each year 2021–2024, 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 2021–2024, assuming Pastner uses the straight-line method to allocate the total compensation cost.

Solutions

Expert Solution

1 Vesting Dt 2021 2022 2023 2024
Dec 31, 2021 3,60,000
Dec 31, 2022 2,00,000 2,00,000
Dec 31, 2023 1,44,000 1,44,000 1,44,000
Dec 31, 2024 1,20,000 1,20,000 1,20,000 1,20,000
8,24,000 4,64,000 2,64,000 1,20,000
Total 16,72,000
Working
Vesting (3,20,000) FV per Option Cost
Dec 31, 2021 80,000 4.5 3,60,000
Dec 31, 2022 80,000 5 4,00,000
Dec 31, 2023 80,000 5.4 4,32,000
Dec 31, 2024 80,000 6 4,80,000
Total Compensation Expense 16,72,000
Recognized the minimum amount vested by the date
Company met the constraint
Year 2021 8,24,000 recognised > 3,60,000 Vested
Year 2022 12,88,000(8,24,000+4,64,000) recognised > 7,60,000(3,60,000+4,00,000) Vested
Year 2023 15,52,000(8,24,000+4,64,000+2,64,000) recognised > 11,92,000(3,60,00+4,00,000+4,32,000 Vested
2 Compensation Expenses Recorded (Straight-Line Method)
2021 2022 2023 2024 Total
Compensation Expenses 4,18,000 4,18,000 4,18,000 4,18,000 16,72,000
Total Compensation Expenses allocated over the years equally under Straight Line Method

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