On January 1, Year 1, Fields Corporation granted 200,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $11 on the date of grant. Fields chooses to adjust the fair value of the options for the estimated forfeitures. If unexpected turnover in Year 2 caused Fields to estimate that 12% of the options would be forfeited, what amount of compensation expense should Fields recognize in Year 2? (Round intermediate calculations and your final answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

The total compensation expense is calculated as the fair value of the options ($11) multiplied by the number of options (200,000) and adjusted for estimated forfeitures (12%). This gives a total of $1,936,000. Since the vesting period is 3 years, the annual expense is $645,333. Adjusting for the forfeiture estimate, the Year 2 expense is $557,334.

On January 1, Year 1, Fields Corporation Granted 200,000 Stock