ExpertHard1 markMultiple Choice
CPA · Question 28 · Area 3: Technical Accounting and Reporting
On January 1, Year 1, Company X grants 10,000 stock options to executives. <br/>- Vesting Period: 3 years (cliff vesting)<br/>- Fair Value per option at grant date: $15<br/>- Estimated forfeiture rate: 5% per year<br/><br/>In Year 1, 4% of options are forfeited. The company adjusts its estimated forfeiture rate to 4% per year. What amount of compensation expense should be recognized in Year 1?
On January 1, Year 1, Company X grants 10,000 stock options to executives. <br/>- Vesting Period: 3 years (cliff vesting)<br/>- Fair Value per option at grant date: $15<br/>- Estimated forfeiture rate: 5% per year<br/><br/>In Year 1, 4% of options are forfeited. The company adjusts its estimated forfeiture rate to 4% per year. What amount of compensation expense should be recognized in Year 1?
Answer options:
A.
$50,000
B.
$44,237
C.
$42,869
D.
$48,000
How to approach this question
1. Calculate Total Fair Value. 2. Apply Forfeiture Rate for the FULL vesting period (Year 1 * Year 2 * Year 3). 3. Divide by Vesting Period. Note: The forfeiture rate is cumulative over the 3 years.
Full Answer
B.$44,237✓ Correct
We use the updated estimated forfeiture rate of 4%. <br/>Options expected to vest = 10,000 * (1 - 0.04)^3 = 8,847.36.<br/>Total Compensation Cost = 8,847.36 * $15 = $132,710.<br/>Year 1 Allocation = $132,710 / 3 years = $44,237.
Common mistakes
Applying the forfeiture rate only once; ignoring the cumulative effect.
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