If unexpected turnover in 2017 caused the company to estimate that 10% of the options would be forfeited,what amount should M recognize as compensation expense for 2017?
A)$ 30,000.
B)$ 60,000.
C)$120,000.
D)$150,000.

Question

Quizplus · Accepted Answer

If the company estimates that 10% of the options will be forfeited, they should adjust their estimate and calculate compensation expense for 90% of the options granted. The compensation expense should be calculated using the fair value of the options at the grant date. 
In this case, the fair value of the options granted is $20 per option. 
Total options granted = 10,000 options
90% of options granted = 9,000 options
Compensation expense per option = $20
Compensation expense for 9,000 options = $20 x 9,000 = $180,000
However, this is the total compensation expense for the entire vesting period. Since the options were granted at the beginning of 2017 and vested over a two-year period, the compensation expense for 2017 would be half of the total, or $90,000. 
Since the company has already recognized $30,000 in compensation expense, the additional amount to recognize in 2017 is $60,000 (option C).

If Unexpected Turnover in 2017 Caused the Company to Estimate