On January 1, 2009, 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

The estimate of the total compensation to be recorded over the four years is $200,000 ($5 fair value per option x 40,000 options). Since the options are not exercisable unless the stock price increases by 5%, a market condition exists. However, this market condition is already reflected in the fair value estimate. Therefore, compensation expense will be recognized regardless of if and when the market condition is met. The annual compensation expense will be $50,000 ($200,000 divided by 4 years). Therefore, the correct choice is C.

On January 1, 2009, Oliver Foods Issued Stock Options for 40,000