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%.
-
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.At the end of 2012, only 30, 000 options vest as only 30 of the 40 executives actually remain.The compensation expense for 2012 will be (Round off turnover calculations to three decimal places and answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The compensation expense for 2012 is calculated by first determining the total compensation cost based on the fair value of the options that are expected to vest. Initially, the company estimated a 4% annual turnover, but this was later adjusted to 5%. With 40 executives initially granted 1,000 shares each at a fair value of $7 per option, the total grant-date fair value is 40,000 shares * $7 = $280,000. Considering the revised 5% annual turnover rate, the expected number of options to vest would be 95% of 40,000 shares = 38,000 shares. However, only 30,000 options actually vest. The compensation expense is recognized over the service period of three years. By the end of 2012, the entire service period has elapsed, and the total compensation cost should be adjusted to reflect the actual vested options. The expense recognized each year should be one-third of the adjusted total compensation cost, taking into account the actual vested options (30,000 shares * $7 = $210,000 total compensation cost over three years). Since the question asks for the compensation expense for 2012 specifically, and assuming the expense is recognized evenly over the three years, the annual expense would be $210,000 / 3 = $70,000. However, the correct calculation needs to account for the adjustment in the final year to match the actual vested options, which may involve recalculating the cumulative expense to date and adjusting the final year's expense accordingly. Given the choices provided and the need for a specific calculation method as per the question's instructions, the correct answer would involve calculating the difference in expected expense based on the revised estimate and the actual outcome, leading to the selection of choice A as the closest match based on the provided calculation method and rounding instructions. However, without the specific calculation details provided in the question, the explanation relies on understanding the principles of adjusting compensation expense based on actual vesting outcomes versus initial estimates.

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