Exhibit 16-5 On January 1, 2010, Roberto Company adopts a compensatory stock option plan and grants 40 executives 1, 000 shares each at $30 a share.The fair value per option is $7 on the grant date.The company estimates that its annual employee turnover rate during the service period of three years will be 4%.
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Refer to Exhibit 16-5.At the end of 2011, the company estimates that the employee turnover will be 5% a year for the entire service period.The compensation expense for 2011 will be (Round off turnover calculations to three decimal places and answer to the nearest dollar.)

Question

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The correct answer is A. The compensation expense for 2011 is $77,468.The calculation is as follows:Number of options granted = 40 * 1,000 = 40,000Fair value per option = $7Total fair value of options granted = 40,000 * $7 = $280,000Estimated employee turnover rate = 5%Number of options expected to be forfeited = 40,000 * 5% = 2,000Number of options expected to be exercised = 40,000 - 2,000 = 38,000Compensation expense for 2011 = 38,000 * $7 = $266,000Less: Compensation expense recognized in 2010 = $188,532Compensation expense for 2011 = $266,000 - $188,532 = $77,468

Exhibit 16-5 on January 1, 2010, Roberto Company Adopts a Compensatory