Question

On January 1, year 1, a company grants 5,000 nonqualified stock options to an employee with a strike price of $3 per option and fair value of $8 per option. All of the options vest at the end of five years from the grant date. At the end of year 1, the company's stock price was $10 per share. What amount of annual stock compensation cost should the company report for year 1?

Answer 1

Answer:

$8,000

Explanation:

The following compensation cost shall be recognised in the accounts of the Company as at December 31, Year 1 in respect of employee share options:

5,000*8*1/5=$8,000

In the above calculation, 5000 represents number of share granted to employee,8 represent the fair value of the option at the grant dated and 1/5 represent first year of the 5-year requisite service condition for the exercise of share options.