Under its executive stock option plan,M Corporation granted options on January 1,2016,that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years,but not before December 31,2018 (the vesting date).The exercise price is the market price of the shares on the date of grant,$18 per share.The fair value of the options,estimated by an appropriate option pricing model,is $4 per option.No forfeitures were anticipated;however,unexpected turnover during 2017 caused the forfeiture of 5% of the stock options.Ignoring taxes,what is the effect on earnings in 2017?
A)$18.5 million.
B)$18 million.
C)$20 million.
D)$19 million.

Question

Quizplus · Accepted Answer

The number of stock options forfeited is 5% of 15 million, which is 750,000. The total fair value of the options is 15 million x $4 = $60 million. Therefore, the fair value of the forfeited options is 750,000 x $4 = $3 million. This amount is recognized as a reduction in compensation expense in the year of forfeiture. The remaining fair value of the options is $57 million ($60 million - $3 million). This amount is recognized as compensation expense over the remaining vesting period, which is 6 years (8 years - 2 years elapsed). Therefore, the annual compensation expense is $9.5 million ($57 million ÷ 6 years). The total compensation expense recognized in 2017 is $9.5 million x 2 years = $19 million.

Under Its Executive Stock Option Plan,M Corporation Granted Options on January