ExpertMedium1 markMultiple Choice
CPA · Question 15 · Area II: Technical Accounting
A company issues 10,000 stock options to employees on Jan 1, Year 1. The options vest over 4 years (cliff vesting). The fair value of each option at grant date is $12. The exercise price is $50. The stock price at grant date is $50. At Dec 31, Year 1, the stock price is $55. What compensation expense should be recognized for Year 1?
A company issues 10,000 stock options to employees on Jan 1, Year 1. The options vest over 4 years (cliff vesting). The fair value of each option at grant date is $12. The exercise price is $50. The stock price at grant date is $50. At Dec 31, Year 1, the stock price is $55. What compensation expense should be recognized for Year 1?
Answer options:
A.
$0
B.
$30,000
C.
$120,000
D.
$12,500
How to approach this question
Calculate Total Compensation Cost (Options × Grant Date FV). Divide by Vesting Period.
Full Answer
B.$30,000✓ Correct
ASC 718 requires equity-classified stock options to be measured at fair value at the grant date ($12). Total cost = 10,000 × $12 = $120,000. This cost is recognized straight-line over the requisite service period (4 years). $120,000 / 4 = $30,000 per year.
Common mistakes
Revaluing the options based on year-end stock price (only done for liability awards); recognizing all expense immediately.
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