On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.7 million stock opt

Question

On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.7 million stock options to key executives exercisable for 1.7 million shares of the company’s common stock at $30 per share. The stock options are intended as compensation for the next three years. The options are exercisable within a four-year period beginning January 1, 2021, by the executives still in the employ of the company. No options were terminated during 2018. The market price of the common stock was $35 per share at the date of the grant. HMCC estimated the fair value of the options at $6 each. 1% of the options are forfeited during 2019 due to executive turnover.

What amount should HMCC record as compensation expense for the year ended December 31, 2019, assuming HMCC chooses the option to record forfeitures as they actually occur??

Explanation / Answer

Total Estimated Compensation Expense at the end of 2018 = Stock Options*Fair value per option

= 1.7 million*$6 = $10.20 million

Compensation Expense to be recognized in 2018 = $10.20 million/3 yrs = $3.40 million

Estimated Compensation Expense at the end of 2019 = 1.7 million*99%*$6 = $10.098 million

Compensation Expense to be recognized upto 2019 = 2/3 of $10.098 million = $6.732 million

Compensation Expense for 2019 = Expense upto 2019 - Expense recognized in 2018

= $6.732 million - $3.40 million = $3.332 million

Therefore, HMCC will record $3.332 million as compensation expense for the year ended December 31, 2019.

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