Red Company is a calendar-year firm with operations in several countries. At January 1,2011, the company had issued 40,000 executive stock options permitting executives to buy40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:

Vesting Date Amount Vesting Fair Value per option

Dec 31 2011 20% $7

Dec 31 2012 30% $8

Dec 31 2013 50% $12

What is the compensation expense related to the options to be recorded in 2012?

Question

Business

Rodriguez

25 February, 08:47

Red Company is a calendar-year firm with operations in several countries. At January 1,2011, the company had issued 40,000 executive stock options permitting executives to buy40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:

Vesting Date Amount Vesting Fair Value per option

Dec 31 2011 20% $7

Dec 31 2012 30% $8

Dec 31 2013 50% $12

What is the compensation expense related to the options to be recorded in 2012?

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Answers (1)

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Billy Waller · Answer 1

The correct answer is $128,000.

Explanation:

According to the scenario, the computation of the given data are as follows:

For Dec. 31 2012

We can calculate the compensation expense to be recorded by using following formula:

Compensation Expense = ((1 : 2) * (30% * 40,000 * $8)) + ((1 : 3) * (50% * 40,000 * $12))

= (0.5 * 96,000) + (0.34 * 240,000)

=$128,000