Pastner Brands is a calendar-year firm with operations in several countries. As
ID: 2565270 • 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, 2016, the company issued 520,000 executive stock options permitting executives to buy 520,000 shares of Pastner stock for $40 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2016 (graded vesting). Pastner elects to measure the fair value of all options on January 1, 2016, to be $5.10 per option (tranche) using a single weighted-average expected life of the options assumption. Required 1. Determine the compensation expense related to the options to be recorded each year 2016-2019 assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately. Shares Compensation Expense Recorded in: 2016 2017 2018 2019 Vesting at: Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Total 2. Determine the compensation expense related to the options to be recorded each year 2016-2019 assuming Pastner uses the straight-line method to allocate the total compensation cost. 2016 2017 2018 2019 Total Compensation expenseExplanation / Answer
2. Compensation expense using straight line method
= 520000×5.10/4years = 663000
Thus expense of $663000 will be recorded each year.
1.Compensation expense assuming cost is allocated for each group separately
2016
=exp for shares vesting at 31 dec, 2016 = 130000×5.10 = $663000
Exp for shares vesting at 31 dec,2017 = 130000×5.10/2years = $331500
Exp for shares vesting at 31 dec, 2018 = 130000×5.10/3years
= $221000
Exp for shares vesting at 31 dec, 2019 = 130000×5.10/4years
= $165750
Thus total exp to be recorded in 2016 = $1381250
2017
Exp for shares vesting at 31 dec 2017
= 130000×5.10/2 ×2years (-) exp already recorded
= 663000-331500 = $331500
Exp for shares vesting at 31 dec,2018
= 130000×5.10/3years × 2years (-) exp already recorded
= 442000-221000 = $221000
Exp for shares vesting at 31 dec,2019
= 130000×5.10/4years × 2years (-) exp already recorded
= 331500-165750 = $165750
Thus total exp for 2017 = $718250
2018
exp for shares vesting at 31 dec,2018
= 130000×5.10/3years × 3years (-) exp already recorded
= $663000-221000-221000 = $221000
Exp for shares vesting at 31 dec,2019
= 130000×5.10/4years × 3 years (-) exp already recorded
=497250-165750-165750 =$165750
Thus total exp to be recorded in 2018 = $386750
2019
Exp for shares vesting at 31 dec,2019
= 130000×5.10/4years × 4years (-) exp already recorded
=663000-165750-165750-165750 = $165750