On January 1, 2014, Lou Company granted 90,000 stock options to certain executiv
ID: 2500540 • Letter: O
Question
On January 1, 2014, Lou Company granted 90,000 stock options to certain executives.
The options are exercisable no sooner than December 31, 2016, and expire on January 1, 2020.
Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.
No forfeitures were anticipated.
A) What amount should Lou recognize as compensation expense for 2014?
B) If unexpected turnover in 2015 caused the company to estimate that 10% of the options would be forfeited, what amount should Lou recognize as compensation expense for 2015?
Explanation / Answer
Stock value : 12
Option price : 5
Total stock option : 90,000
Cost to the company 90,000 * 7 = 630,000
A) Compensation expense to be recognised over the period of three years
Compensation expense for 2014: 630,000 / 3 = $ 210,000 /-
Expense to be recognised in 2014 : $ 210,000/-
B) If 10 % of the option forfeited in 2015 the number of option will be 81,000
Cost to be recognised : 81,000 * 7 = 567,000
Expense for the year = 567,000 * 2/3 = 378,000
Less expense already recognised 210,000
Expense to be recognised in 2015 : $ 168,000
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