On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.3 million stock opt

Question

On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.3 million stock options to key executives exercisable for 1.3 million shares of the company’s common stock at $25 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 $30 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

Schedule showing the amount of compensation expense allocable to each year Details 2018 2019 Total No. of options expected to vest on exercise date 1300000 1287000 Fair value of options 6 6 Total value 7800000 7722000 Total cumulative costs of Stock Options 2600000 5148000 Less : Amount already recognized 0 2600000 Amount of compensaion expense 2600000 2548000 So, HMCC should record, for the year ended December 31, 2019, 2548000 as compensation expense

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