Question

On January 1, 2017, RED Inc. issued stock options for 200,000 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 i achieved, butin 20)1S. afte oxne year 6% in three years, Blue initially estimates that it is not probable the goal but in 2018, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2019 earnings in 2018? Ignoring taxes, what is the effect on A. $200,000 B. $400,000 C. $600,000 D. $800,000

Answer 1

B. $400,000

Step-by-step explanation:

For computing the effect, we have to compute the total compensation expense which is shown below:

Total compensation expense = Number of stock options issued × estimated fair value

= 200,000 shares × $6

= $1,200,000

This compensation is for 3 years, but we have to compute for a one year

So, it would be

= Total compensation expense ÷ number of years

= $1,200,000 ÷ 3 years

= $400,000