Question

On January 1, Year 1, Manning Company granted 97,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3, and expire on January 1, Year 6. Each option can be exercised to acquire one share of $1 par common stock for $8. An option-pricing model estimates the fair value of the options to be $4 on the date of grant. At the time of issuance, no estimate of forfeitures is made. If unexpected turnover in Year 2 caused the company to now estimate that 20% of the options would be forfeited, what amount should Manning recognize as compensation expense for Year 2? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Answer 1

$77,600

Step-by-step explanation:

Total compensation expenses = Number of options × Option fair of value = 97,000 × $4 = $388,000

Annual compensation expenses = Total compensation expenses ÷ Number of years allowed to exercise the option = $388,000 ÷ 3 = $129,333.33

Therefore, $129,333.33 is recognized as compensation expenses in year 1.

Since 20% of the options are forfeited because of an unexpected turnover, compensation expenses reduces to:

New compensation expenses = $388,000 × (100% - 20%) = $310,400

Year 2 accumulated expenses = ($310,400 ÷ 3) × 2 = $206,933.33

Compensation expenses to recognize in year 2 = Year 2 accumulated expenses - Compensation expenses already recognized in year 1 = $206,933.33 - $129,333.33 = $77,600

Therefore, Manning should recognize $77,600 as compensation expense for Year 2.