On January 1, 2018, Felix Austead Athletic Club (FAAC) granted stock options to key executives exercisable for 500,000 shares of the company's common stock at $18 per share. The stock options are intended as compensation for the next four years. The options are exercisable within a four-year period beginning January 1, 2022, by the executives still in the employ of the company. No options were terminated during 2018, but the company anticipates 5% forfeitures over the life of the stock options. The market price of the common stock was $18 per share at the date of the grant. FAAC estimated the fair value of the options at $4 each. 1% of the options are forfeited during 2019 due to executive turnover. What amount should FAAC record as compensation expense for the year ended December 31, 2019, assuming FAAC chooses the option not to estimate forfeitures?
A) $480,000.
B) $500,000.
C) $2,160,000.
D) $2,250,000.

Question

Quizplus · Accepted Answer

11ea937b_35a0_9c84_a419_c7e3c117ab9d_TB2599_00 As a practical expedient, companies can elect to account for forfeitures of stock options or restricted stock when they occur rather than estimating them. So rather than reduce in advance the amount to be recorded as compensation expense and paid-in capital, companies choosing this approach reduce those same accounts only if and when a forfeiture occurs. This election only applies to forfeitures related to turnover.

On January 1, 2018, Felix Austead Athletic Club (FAAC) Granted