Pastner Brands is a calendar-year firm with operations in several countries. As
ID: 2522917 • Letter: P
Question
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company issued 440,000 executive stock options permitting executives to buy 440,000 shares of Pastner stock for $39 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2018 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche Is estimated at January 1,2018, as follows: t Fair Val Dec. 31, 2019 Dea. 31, 2020 Dec. 31, 2021 256 259 258 25% $4.00 $4.40 $4.80 $5.60 Required: 1. Determine the compensation expense related to the options to be recorded each year 2018-2021, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately 2. Determine the compensation expense related to the options to be recorded each year 2018-2021, assuming Pastner uses the straight-line method to allocate the total compensation cost. Complete this question by entering your answers in the tabs below. 018-2021, assuming Pastner allocates ine the compensation expense related to the options to be recorded each year 2 the compensation cost for each of the four groups (tranches) separately. (Enter your answers in thousands.) 2018 2019 2020 2021 Dec. 31, 2018 Dec. 31, 2019 Dec. 31, 2020 Dec 31, 2021 o SExplanation / Answer
Solution:
1) Determining the Compensation Expense related to the Options to be Recorded each Year 2018 - 2021:
The Compensation Costs Allocated on a Straight Line Basis Over the Appropriate Vesting Period:
The allocation here meets that constraint:
2) Determining the Compensation Expense Related to the Options to be Recorded each Year 2018 - 2021:
Companies are allowed to use the Straight-line method. The $2,068,000 total compensation cost is allocated equally to 2018, 2019, 2020 and 2021 at $517,000 Each Year.
The Straight-line allocation meets that constraint:
Vesting Date Number Vesting Fair Value Option Compensation Cost Dec. 31, 2018 $110,000 $4.00 $440,000 Dec. 31, 2019 $110,000 $4.40 $484,000 Dec. 31, 2020 $110,000 $4.80 $528,000 Dec. 31, 2021 $110,000 $5.60 $616,000 $2,068,000