Question

On January 1, 2021, Red Inc. issued stock options for 210,000 shares to a division manager. The options have an estimated fair value of $4 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 5% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2021

Answer 1

Answer:

$280,000

Explanation:

Fair value = $4

Options granted = 210,000 shares

Total compensation = Fair value*Options granted

Total compensation = $4 * 210,000

Total compensation = $840,000

Number of years = 3

Compensation per year = Total compensation / Number of years

Compensation per year = $840,000 / 3

Compensation per year = $280,000