Exhibit 15-4
On January 1, 2016, Masters, Inc., grants a compensatory share option plan to 15 of its executives. The plan allows each executive to buy 1,000 shares of its $1 par common stock at $30 per share after a three-year service period. At January 1, 2016, the value of each option is estimated to be $9. The company also estimates it will have an annual
3% employee turnover rate during the service period.
-Refer to Exhibit 15-4. By how much has contributed capital increased as of the beginning of 2019?

Question

Quizplus · Accepted Answer

The contributed capital increases by the amount of cash received when the executives exercise their options, minus the par value of the shares issued. Since the question does not provide information about the executives exercising their options, we assume the increase in contributed capital is due to the recognition of compensation expense over the service period, which is then credited to additional paid-in capital. The total compensation expense is calculated as the value of each option ($9) times the number of options (1,000 shares per executive times 15 executives), adjusted for the estimated turnover rate (3% annual turnover over 3 years). However, without specific details on how the turnover rate affects the calculation, we focus on the initial calculation of compensation expense: 15 executives * 1,000 shares * $9 = $135,000. This amount is recognized over the 3-year service period, but the question asks about the increase in contributed capital at the beginning of 2019, which would include the total compensation expense recognized. Given the choices provided and the lack of specific information on turnover impact, the closest correct answer based on the initial calculation and the premise of the question is D) $123,211, assuming some adjustment for the turnover rate not explicitly calculated here.

Exhibit 15-4 On January 1, 2016, Masters, Inc., Grants a Compensatory Share