Question

On October 1, 2018, Iona Bell Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Bell initially estimates that it is not probable the goal will be achieved, but then after one year, Bell estimates that it is probable that divisional revenue will increase by 6% by the end of 2020. Bell will:

a. record compensation expense of zero in 2019 and in 2020



b. record compensation expense of $300,000 in 2019 and $300,000 in 2020.



c. record compensation expense of $450,000 in 2019 and $450,000 in 2020.



d. record compensation expense of $600,000 in 2019 and $300,000 in 2020.

Answer 1

Answer: d. record compensation expense of $600,000 in 2019 and $300,000 in 2020.

Step-by-step explanation:

In 2019, with 2 years left on the on the incentive, the Iona Bell's estimate has changed from not believing that the target could be reached to believing that it could.

This will move their estimate for Compensation from 0 in 2018 to (300,000 * $3) $900,000 at the end of 2020.

They will have to account for it across the 2 remaining years.

In 2019, with 2 years out of 3 elapsed, they will apportion it in this manner ,

= 900,000 * 2/3 - $0 (previous year's estimate)

= 600,000 - 0

= $600,000

In 2020 with the third year elapsed, they will apportion it as such,

= 900,000 * 3/3 - $600,000 (previous year's estimate)

= $300,000

The correct option is therefore Option D.