Exhibit 16-4 On January 1, 2010, Marvel, Inc., grants a compensatory stock option plan to 10 of its executives.The plan allows each executive to buy 1, 000 shares of its $1 par common stock at $30 a share after a three-year service period.The value of each option is estimated to be $8.The company estimates it will have an annual 2% employee turnover rate during the service period.
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Refer to Exhibit 16-4.What is the compensation expense for the year ended December 31, 2011?

Question

Quizplus · Accepted Answer

The compensation expense for the year ended December 31, 2011, can be calculated as follows:

Number of executives: 10
Number of shares each can buy: 1,000
Total number of shares: 10,000
Option price: $30 per share
Fair value of option: $8 per share

Total fair value of options: $8 x 10,000 = $80,000

Service period: 3 years
Annual turnover rate: 2%
Expected number of executives who will not complete service period: 10 x 2% = 0.2 = 2 (rounded)

Number of executives who will complete service period: 10 - 2 = 8

Compensation expense for 2011 = ($80,000 ÷ 3 years) x (1/8) = $10,000 x 0.125 = $1,250 per executive

Total compensation expense for 2011 = $1,250 x 8 = $10,000

Therefore, the correct answer is B) $25,098.

Exhibit 16-4 on January 1, 2010, Marvel, Inc