ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area II: Technical Accounting
On January 1, Year 1, Tech Co. grants 10,000 stock options to employees. The options vest after 3 years of service. The fair value of each option is $15 on the grant date. On December 31, Year 1, the fair value of the option is $18. Tech Co. estimates 10% forfeitures. What amount of compensation expense should Tech Co. recognize for Year 1?
On January 1, Year 1, Tech Co. grants 10,000 stock options to employees. The options vest after 3 years of service. The fair value of each option is $15 on the grant date. On December 31, Year 1, the fair value of the option is $18. Tech Co. estimates 10% forfeitures. What amount of compensation expense should Tech Co. recognize for Year 1?
Answer options:
A.
$50,000
B.
$45,000
C.
$54,000
D.
$135,000
How to approach this question
1. Determine Total Compensation Cost: (Options * Grant Date FV * (1-Forfeiture)). 2. Allocate over Vesting Period (divide by years). Note: Ignore subsequent FV changes for Equity-classified awards.
Full Answer
B.$45,000✓ Correct
Total Compensation Cost = 10,000 options * (1 - 0.10) * $15 (Grant Date FV) = $135,000. Recognize over 3-year vesting period: $135,000 / 3 = $45,000. The change in FV to $18 is ignored for equity awards.
Common mistakes
Using year-end FV (remeasurement is only for Liability awards); forgetting to prorate over vesting period.
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