Question

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?

Answer 1

The compensation expense related to the options to be recorded in 2012 is $96,000.

Step-by-step explanation:

To calculate the compensation expense related to the options to be recorded in 2012, we need to determine the number of options that vested in 2012 and multiply it by the fair value per option for that year.

In this case, the vesting schedule states that 20% of the options vest in the first year, 30% in the second year, and 50% in the third year. Since it is the second year in 2012, we need to calculate 30% of the total options granted.

So, the compensation expense related to the options to be recorded in 2012 would be calculated as follows:

Number of options vested in 2012 = 30% of 40,000 = 12,000 options

Compensation expense = Number of options vested in 2012 * Fair value per option for 2012= 12,000 * $8

= $96,000

Answer 2

The correct answer is $128,000.

Step-by-step 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