Silo Corp.granted to Donna,its superstar accountant,the option to purchase Silo common shares for $10,on Jan.1,20x1.The market price of the shares on that date was $20.The options can be exercised during the period Jan.1,20x4 through Jan.1,20x6.The number of shares under option is determined by a formula based on Silo earnings each year.The number of shares actually under option will be the formula value on Dec.31,20x3.That formula estimated the following number of shares under option at the end of years: 20x1,200; 20x2,300.The formula determined the number of shares at Dec.31,20x3 to be 400.The market prices for Silo shares at the end of years: 20x1,$25; 20x2,$40,20x3,$50.What is the recorded compensation expense for 20x2,for Donna?

Question

Quizplus · Accepted Answer

The compensation expense is calculated based on the fair value of the options at the grant date, spread over the vesting period. The fair value is the difference between the market price and the exercise price at the grant date, multiplied by the estimated number of shares. For 20x2, the estimated shares are 300, and the fair value per share is $10 ($20 market price - $10 exercise price). The expense for 20x2 is $10 * 300 = $3,000, spread over 3 years (20x1, 20x2, 20x3), resulting in $1,000 per year. For 20x2, the cumulative expense is $2,000, so the expense for 20x2 is $4,000 - $2,000 = $2,000.

Silo CorpGranted to Donna,its Superstar Accountant,the Option to Purchase Silo Common