Question

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

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 ).