Green Company is a calendar-year U.S. firm with operations in several countries.
ID: 2496667 • Letter: G
Question
Green Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2011, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Date Amount Vesting Fair Value per Option
Dec 31, 2011 20% $7
Dec 31, 2012 30% $8
Dec 31, 2013 50% $12
Assuming Green uses the straight-line method, what is the compensation expense related to the options to be recorded in 2012?
Explanation / Answer
The compensation expense related to the options to be recorded in 2012 should be computed as follows:
Total number of stocks issued as executive stock options = 40,000
Vesting amount for 2012 = 30%
Fair value per option on December 31, 2012 = $8
Therefore,
Compensation expense = 40,000 × 30% × $8 = $96,000
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