Question

On January 1, 2018, Red Inc. issued stock options for 280,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2018? (Round your answer to the nearest dollar amount.)

Answer 1

$466,667

Step-by-step explanation:

Compensation expenses for 2018 should be computed as follows:

Fair value of each option = $5

Number of stock options issued = 280,000

Therefore,

Total compensation expense = $5 x 280,000

= $1,400,000

And,

Number of years for which the compensation expense would be recognized = 3

Thus,

Compensation expense for 2018:

= Total compensation expense ÷ Number of years

= $1,400,000 ÷ 3

= $466,667