Question

On January 1, 2021, Red Inc. issued stock options for 250,000 shares to a division manager. The options have an estimated fair value of $7 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 2021

Answer 1

Answer: $583,333

Step-by-step explanation:

Compensation expense for 2021 = Total compensation / Vesting period

Total compensation:

Assuming the goal given is probable, the total compensation is:

= Number of shares * fair value

= 250,000 * 7

= $1,750,000

Vesting period = number of years goal is to be in effect = 3 years

Compensation expense 2021 = 1,750,000 / 3

= $583,333