On January 1, 2016, M Company granted 90,000 stock options to certain executives
ID: 2579891 • Letter: O
Question
On January 1, 2016, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2018, and expire on January 1, 2022. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.
If unexpected turnover in 2017 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2017?
$30,000.
$60,000.
$120,000.
$150,000.
Answer: (90,000 × 5 = $450,000; $450,000 × 90% = $405,000 × 2/3 = $270,000; $270,000 - 150,000 = $120,000
Please show how did they get 150,000?
Explanation / Answer
The $150,000 is the amount already recognised as compensation expense in 2016.
In 2016 ,there was no forefeiture so the expected total expense for 3 years at the end of 2016 =>90,000 *$5 =>$450,000.
out of this $450,000 only ($450,000 *1/3) =>$150,000 is recognised in 2016.
In 2017, when the forefeitures are expected to be 10%
The total compensation expense for 3 years will be (90,000 *$5)*90% =>$405,000.
out of this $405,000 the amount to be recognised by the end of 2 nd year i.e 2017
=>$405,000 * 2/3 =>$270,000.
But,
out of this $270,000 , $150,000 is already recognised in 2016.
so the expense to be recognised in 2017 will be $270,000 - 150,000 =>$120,000.