Red Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2018, the company had issued 40,000 executive stock options permitting executives to buy 40,000 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: What is the compensation expense related to the options to be recorded in 2019?
A) $48,000.
B) $96,000.
C) $128,000.
D) $140,000.

Question

Red Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2018, the company had issued 40,000 executive stock options permitting executives to buy 40,000 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:  What is the compensation expense related to the options to be recorded in 2019?
A) $48,000. 
B) $96,000. 
C) $128,000. 
D) $140,000.

Quizplus · Accepted Answer

11ea937b_35a0_003d_a419_df80837364d1_TB2599_00 The compensation cost is allocated on a straight-line basis over the appropriate vesting (service) period: 11ea937b_35a0_274e_a419_c9a380c8a0e4_TB2599_00 The only stipulation is that at any given date, a company must have recognized at least the amount vested by that date. The allocation meets that constraint:
• The $184,000 recognized in 2018 exceeds the $56,000 vested.
• The $312,000 ($184 + $128) recognized by the end of 2019 exceeds the $152,000 ($56 + $96) vested by the same time.

Red Company Is a Calendar-Year U