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Green Company is a calendar-year U.S. firm with operations in several countries.

ID: 2496667 • Letter: G

Question

Green Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2011, 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:

Vesting Date                      Amount Vesting                               Fair Value per Option

Dec 31, 2011                       20%                                                        $7

Dec 31, 2012                       30%                                                        $8

Dec 31, 2013                       50%                                                        $12                                                                        

Assuming Green uses the straight-line method, what is the compensation expense related to the options to be recorded in 2012?

Explanation / Answer

The compensation expense related to the options to be recorded in 2012 should be computed as follows:

Total number of stocks issued as executive stock options = 40,000

Vesting amount for 2012 = 30%

Fair value per option on December 31, 2012 = $8

Therefore,

Compensation expense = 40,000 × 30% × $8 = $96,000