On January 1, 2016, M Company granted 96,000 stock options to certain executives

Question

On January 1, 2016, M Company granted 96,000 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 $12. An option-pricing model estimates the fair value of the options to be $4 on the date of grant. If unexpected turnover in 2017 caused the company to estimate that 15% of the options would be forfeited, what amount should M recognize as compensation expense for 2017? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

A. $89,600

B. $32,000

C. $48,000

D. $128,000

Explanation / Answer

Answer=Compensation expenses for 2017=A. $89,600

Total compensation expenses need to be recognized for three year=(96000 × 4 )=$384000

Compensation expenses need to be recognized in 2016 before forfeiture=((96000 × 4 )/3)=$128000

Compensation expenses recognized in 2016=$128000

Balance compensation expenses to be recognized in 2017 and 2018=(128000*2)=$256000

Compensation expenses to be recognized in 2017 considering forfeiture

=($384000 x 85% x(2/3))–$128000)=$89600

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