On January 1, 2013, Ace Inc. issued stock options for 210,000 shares to a divisi

Question

On January 1, 2013, Ace Inc. issued stock options for 210,000 shares to a division manager. The options have an estimated fair value of $4 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in two years. Ace initially estimates that it is probable the goal will be achieved. In 2014, after one year, Ace estimates that it is not probable that divisional revenue will increase by 6% in two years. Ignoring taxes, what is the effect on earnings in 2014

Explanation / Answer

In this case,there would not be any effect on earning as the option is not exercisable if divisional revenue will not be increased by 6%.

And if the company made a provision of this in 2013 (210,000*4)=$840,000 then it has to reverse it in 2014 now which will increase account profit by $840,000.

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