On January 1,Year 1,Gallagher Corporation issued stock options for 300,000 shares to a division manager.The options have an estimated fair value of $6 each.These options are not exercisable unless division revenue increases by 8% in four years.Gallagher estimates that it is probable that the goal will be achieved.What is pretax compensation expense for year 1?

Question

Quizplus · Accepted Answer

The pretax compensation expense for year 1 is calculated using the following formula: 
Pretax compensation expense = (Total number of shares x Fair value per share) x Probability of achieving the condition in year 1
= (300,000 x $6) x 0 = $0
Since the condition is not expected to be achieved in year 1, there is no compensation expense recognized in year 1. The compensation expense will be recognized only if and when the condition is met. Therefore, the correct answer is B, which represents $0 pretax compensation expense for year 1.

On January 1,Year 1,Gallagher Corporation Issued Stock Options for 300,000