Question

On January 1, 2020, after the conclusion of a great year, the Board of Directors of...

On January 1, 2020, after the conclusion of a great year, the Board of Directors of Amazing Company decided to grant their Senior Executives a package of stock options. The terms of the stock option grant were asfollows:
1,000,000 stock options will be granted, with an exercise price of $ 40 per share. Senior Executives must remain with the company for four years in order for the options to "vest". The options may be exercised anytime after January 1, 2024, but will expire on December 31, 2029.
On January 1, 2020, the common stock of Amazing1 Company traded at $ 30 per share, and a compensation consultant estimated that the value of an option on that date was $ 16 per option. On December 31, 2020,the value of Amazing Company had increased to $ 32 per share, and the fair value of an option was estimated to still be $ 16, with the impact of the increase of the share price offsetting the fact that one year of the time horizon of the option had expired. On December 31, 2021, the value of a share of Amazing Company stock had increased to $ 37 per share, and the fair value of an option was estimated to be $ 18 per option.In accordance with US GAAP, how much compensation cost, if any, should be reported for the year-ending December 31, 2021 (i.e. the second year in which the option grant was outstanding). You may assume that Amazing Company believes that none of their executives will foreit any options.


A.$0

B.$ 2,000,000

C.$ 4,000,000

D.$ 5,000,000

Homework Answers

Answer #1
Compensation Cost for year ending December 31, 2020 $ 4,000,000 ( 1,000,000 x 16 x 1/4 )
Compensation Cost for year ending December 31,2021
Should be Cumulative compensation Cost at end of year 2021 $ 9,000,000 ( 1,000,000 x 18 x 2/4 )
Less: Compensation cost recorded in year 2020 $ 4,000,000
Compensation cost should be reported for year ending December 31,2021 $ 5,000,000
Correct answer is option D ( i.e. $ 5,000,000 ).
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
On January 1, 2020, the stockholders of Cery, Inc. adopted a stock option plan for top...
On January 1, 2020, the stockholders of Cery, Inc. adopted a stock option plan for top executives whereby each executive might receive rights to purchase up to 15,000 shares of common stock at $40 per share. The par value is $10 per share. On January 1, 2021, options were granted to five executives to purchase 15,000 shares each. The exercise period for these options begins on January 1, 2023, and each grantee executive had to remain an employee of the...
On October 15, 2015, the board of directors of Ensor Materials Corporation approved a stock option...
On October 15, 2015, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2016, 19 million stock options were granted, exercisable for 19 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2019, and December 31, 2021, at 90% of the quoted market price on January 1, 2016, which was $20. The fair value of the 19 million options, estimated by an appropriate option...
On January 1, 2019, a compensation plan with a stock option (stock option plan) was created...
On January 1, 2019, a compensation plan with a stock option (stock option plan) was created for senior management (senior executives) in which it is stipulated that they can receive the right to purchase up to 18,000 shares common at $ 40 per share. The par value of the share is $ 10. On February 1, 2019 the options were granted to the executives. Options are non-transferable and must continue as employees in order to exercise the option. The options...
On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.2 million stock options to key...
On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.2 million stock options to key executives exercisable for 1.2 million shares of the company’s common stock at $24 per share. The stock options are intended as compensation for the next three years. The options are exercisable within a four-year period beginning January 1, 2021, by the executives still in the employ of the company. No options were terminated during 2018. The market price of the common stock was $28...
On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.7 million stock options to key...
On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.7 million stock options to key executives exercisable for 1.7 million shares of the company’s common stock at $30 per share. The stock options are intended as compensation for the next three years. The options are exercisable within a four-year period beginning January 1, 2021, by the executives still in the employ of the company. No options were terminated during 2018. The market price of the common stock was $35...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2021, the company issued 480,000 executive stock options permitting executives to buy 480,000 shares of Pastner stock for $42 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2021 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company issued 440,000 executive stock options permitting executives to buy 440,000 shares of Pastner stock for $36 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2018 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they...
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021,...
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company’s $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $16 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive...
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2021, the company issued 480,000 executive stock options permitting executives to buy 480,000 shares of Pastner stock for $41 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2021 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they...
On January 1, 2021, a company granted stock options to employees for the purchase of 16,000...
On January 1, 2021, a company granted stock options to employees for the purchase of 16,000 shares. Each option allows the employees to purchase one share of the company's $10 par common stock at $29 per share. The options are exercisable during a six-year period beginning January 1, 2023 by grantees still employed by the company. The Black-Scholes option pricing model determines total compensation expense to be $450,000. The market price of common stock was $22 per share at the...