Exhibit 15-4 On January 1, 2014, Masters, Inc., grants a compensatory share option plan to 15 of its executives. The plan allows each executive to buy 1,000 shares of its $1 par common stock at $30 a share after a three-year service period. The value of each option is estimated to be $9. The company estimates it will have an annual 3% employee turnover rate during the service period.
-Refer to Exhibit 15-4. By how much has contributed capital increased as of the beginning of 2017?

Question

Quizplus · Accepted Answer

The contributed capital is initially increased by the value of the options granted, which is 15 x 1,000 shares x $9 = $135,000. However, since there is an estimated 3% employee turnover rate, we need to adjust for the potential early exercise of options. The number of executives who are estimated to leave the company during the service period is 15 x 3% x 3 years = 1.35 or 1 employee. Therefore, the potential savings from avoiding the cost of compensation for that 1 employee is 1 x 1,000 shares x $30 = $30,000. Thus, the net increase in contributed capital is $135,000 - $30,789 = $123,211.

Exhibit 15-4 on January 1, 2014, Masters, Inc