On January 1, 2018, Oliver Foods issued stock options for 40,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Oliver Foods' stock price increases by 5% in four years. Oliver Foods initially estimates that it is not probable the goal will be achieved. How much compensation will be recorded in each of the next four years?

Question

Quizplus · Accepted Answer

If an award contains a market condition such as the stock price reaching a specified level, then no special accounting is required. The fair value estimate of the share option ($5) already implicitly reflects market conditions due to the nature of share option pricing models. So, Oliver recognizes compensation expense regardless of when, if ever, the market condition is met. The estimate of the total compensation would be: 40,000 × $5 = $200,000
One-fourth of that amount, or $50,000, will be recorded in each of the four years.

On January 1, 2018, Oliver Foods Issued Stock Options for 40,000