On October 1, 2018, Iona Ford Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Ford initially estimates that it is probable the goal will be achieved. After one year, Ford estimates that it is not probable that divisional revenue will increase by 5% in three years. In 2019, Ford will:
A) reverse the amount expensed in 2018.
B) record one-half of the new estimated total compensation.
C) take no action.
D) continue to record the original estimated compensation.

Question

Quizplus · Accepted Answer

The original estimate of the total compensation would be: 11ea937b_35a1_86ec_a419_51807286075c_TB2599_00 One-third of that amount, or $300,000, would be recorded in each of the three years.
The new estimate of the total compensation would change to: 11ea937b_35a1_86ed_a419_a9d9c02470a1_TB2599_00 In that case, in 2019, Ford would reverse the $300,000 expensed in 2018 because no compensation can be recognized for options that don't vest due to performance targets not being met, and that's the new expectation.