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?

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aquialaska aquialaska · Answer 1 · 2020-04-20T03:51:50+02:00

Answer:

The correct answer is $128,000.

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

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