Question

On January 1, 2020, Company A issued stock options for 828 shares to a executive. The options have an estimated fair value of $9 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Company A's stock price increases by 5% in six years. Company A initially estimates that it is not probably the goal will be achieved.

How much compensation will be recorded in 2020?

Group of answer choices

$2,484

No compensation should be recorded because it is not probable the goal will be achieved.

$7,452

$1,242

20

Answer 1

As per generally accepted accounting principle, a expenses should be recognized when it is probable to occur in future & amount is measurable.

Since Company A initially estimates that it is not probably the goal will be achieved, it is not probable that expenses will occur in future, hence expenses shall not be recognized.

Option 2 is correct i.e. No compensation should be recorded because it is not probable the goal will be achieved.

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