Question

On October 1, 2018, Iona Frisbee Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Frisbee initially estimates that it is probable the goal will be achieved. How much compensation will be recorded in each of the next three years?

Answer 1

Answer:

$300,000

Explanation:

Option expenses to be recognized in the first year ,

= $\frac{N\ *\ FV}{Total\ vesting\ period}$    ×  period elapsed   - Expenses already recognized

wherein N = No of options expected to be vested

              FV = Fair value on the grant date

              Vesting period = The time period after which the options can be exercised

Thus, after the first year, employee compensation expenses to be recognized

= $\frac{300000 *\ 3}{3\ years}$ × 1 year = $300,000 - 0 = $300,000

Similarly, for the second year, option expenses to be recognized would be,

= $\frac{300000 *\ 3}{3\ years}$  × 2 years - $300,000 =  $300,000

Similarly for the third year

= $\frac{300000 *\ 3}{3\ years}$ × 3 years - ($300,000+ 300,000)  = $300,000

The journal entry to be passed each year would be

Stock Option Compensation Expense A/C   Dr. $300,000

                           To Stock Options A/C                        $300000  

(Being stock option expenses for the year recognized)

Answer 2

Answer:

Per year compensation = $300,000

Explanation:

Given:

Number of shares = 300,000

Estimated fair value = $3 each

Total number of year = 3 year initially

Computation of total compensation :

Total compensation = Number of shares × Estimated fair value

Total compensation = 300,000 × $3

Total compensation = $900,000

Computation of Per year compensation:

Per year compensation = Total compensation / Total number of year

Per year compensation = $900,000 / 3

Per year compensation = $300,000