Question

On January 1, 2020, Blue Inc. issued stock options for 290,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in four years. Blue initially estimates that it is not probable the goal will be achieved, but in 2022, after three years, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2023. Ignoring taxes, what is the increase in expense in 2022

Answer 1

Answer: $1,305,000

Explanation:

Blue initially estimated that the goal would not be achieved so had not catered for the expense in the case that it would.

In 2022, when Blue estimates that the target will be reached, they will have to account for the expenses for the three years for the option because the options value is to be amortized over the period in question which is 4 years.

Options value = 290,000 * 6

= $1,740,000

Over 4 years:

= 1,740,000 / 4

= $435,000

Over the three years:

= 435,000 * 3

= $1,305,000

Expenses will increase by 1,305,000 for the year.