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, 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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Corporate dividend (from 5% owned corporation)
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Municipal bond interest
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Short-term capital loss
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Cost of goods sold
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Corporate dividend (from 5% owned corporation)
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Municipal bond interest
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Long-term capital gain
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