P 19-2 Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive
P 19-2 Stock options; graded vesting
Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2013 the company issued 400,000 executive stock options permitting executives to buy 400,000 shares of Pastner stock for $34 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2013 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2013, as follows:
Vesting date | Amount vesting | Fair value for option |
December 31, 2013 | 25% | $3.50 |
December 31, 2014 | 25% | $4.00 |
December 31, 2015 | 25% | $4.50 |
December 31, 2016 | 25% | $5.00 |
Required:
1. Determine the compensation expense related to the options to be recorded each year 2013–2016, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately.
2. Determine the compensation expense related to the options to be recorded each year 2013–2016, assuming Pastner uses the straight-line method to allocate the total compensation cost.
SOLUTION PREVIEW
| We treat each individual vesting date as a separate award: | ||||
| Vesting | Number | Fair Value | Compensation | |
| Date | Vesting | per Option | Cost | |
| Dec. 31, 2013 | 100,000 | $3.50 | $350,000 | |
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File name: P19-2 Pastner-Brands .xls File type: application/vnd.ms-excel Price: $5
