Exhibit 15-6 On January 1, 2014, 50 executives were given a performance-based share option plan that would award them with a maximum of 300 shares of $10 par common stock for $20 a share. On the grant date, the fair value of an option was $16.50. The number of options that will vest depends on the size of the annual average increase in sales over the next three years according to the following table: On the grant date, the company estimates the annual average sales increase will be 14%.
-Refer to Exhibit 15-6. In 2015, the company determined that the actual annual average increase was 16%. The compensation expense for 2015 will be
A) $123,750
B) $247,500
C) $ 82,500
D) $ 55,000

Question

Exhibit 15-6 On January 1, 2014, 50 executives were given a performance-based share option plan that would award them with a maximum of 300 shares of $10 par common stock for $20 a share. On the grant date, the fair value of an option was $16.50. The number of options that will vest depends on the size of the annual average increase in sales over the next three years according to the following table:  On the grant date, the company estimates the annual average sales increase will be 14%.
-Refer to Exhibit 15-6. In 2015, the company determined that the actual annual average increase was 16%. The compensation expense for 2015 will be
A) $123,750 
B) $247,500 
C) $ 82,500 
D) $ 55,000

Quizplus · Accepted Answer

The number of shares to be vested depends on the average annual increase in sales. As the actual annual average increase in sales for 2015 was 16%, which is within the range of 11-20%, all options will vest. Therefore, the compensation expense for 2015 will be 300 options multiplied by the fair value of an option on the grant date ($16.50) multiplied by the proportion of the vesting period elapsed (1/3). This equals $123,750. Hence, the answer is A.

Exhibit 15-6 on January 1, 2014, 50 Executives Were Given