Question

On January 1, 2021, Cori Ander Herbs granted restricted stock units (RSUs) representing 300,000 of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $14 per share on the grant date. At the date of grant, the company anticipated that 4% of the recipients would leave the firm prior to vesting. In 2022, 3% of the options are forfeited due to executive turnover. The company chooses the option not to estimate forfeitures. What amount should the company record as compensation expense for the year ended December 31, 2022

Answer 1

Answer: $1,288,000

Explanation:

The amount should the company record as compensation expense for the year ended December 31, 2022 will be calculated thus

Number of RSUs = 300,000

Market price of shares = $14

Term of RSUs = 3 years

The compensation expense for year 1 which is 2021 will be:

= [(300,000 × $14) × 1 / 3] - $0

= $1,400,000

The compensation expense for year 2 which is 2022 will be:

= [(288,000 × $14) * 2 / 3] - $1,400,000

= $2,688,000 - $1,400,000

= $1,288,000

Therefore, the amount should the company record as compensation expense for the year ended December 31, 2022 will be $1,288,000

Note that the number of RSUs in 2022 was calculated as:

= 300,000 × (100% - 4%)

= 300,000 × 96%

= 288,000