At January 1, Year 1, Edwards Company issued 10,000 stock options permitting emp

Question

At January 1, Year 1, Edwards Company issued 10,000 stock options permitting employees to buy 10,000 shares of stock for $50 per share. The vesting schedule (graded-vesting) and value of the options that vest over the 3-year period is estimated at January 1, Year 1, as set forth in the following table.

What is the compensation cost for Year 1 relating to these stock options?

Vesting Date Amount Vesting Fair Value per Option Dec. 31, Year 1 10 % $ 2 Dec. 31, Year 2 30 % $ 3 Dec. 31, Year 3 60 % $ 4

Explanation / Answer

As the Cost for 30% and 60% options will be vested in 2 and 3 years respectively, proportionate cost will be accrued in 1st Year

No of options for which Cost is to be accrued Total Options % Vesting Year 1 Year 2 Year 3                     10,000 10%        1,000 30%        1,500          1,500 60%        2,000          2,000            2,000 Total 100%        4,500          3,500            2,000 Fair Value- $                2                   3                     4 Cost for 1st year $        9,000

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