Exhibit 15-7 On January 1, 2013, 70 executives were granted a performance-based share option plan that would award them each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the next three years. The fair value per option on the grant date was $16. The award table is as follows: The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
-Refer to Exhibit 15-7. The compensation expense for 2013 is (to the nearest dollar)

Question

Exhibit 15-7 On January 1, 2013, 70 executives were granted a performance-based share option plan that would award them each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the next three years. The fair value per option on the grant date was $16. The award table is as follows:  The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
-Refer to Exhibit 15-7. The compensation expense for 2013 is (to the nearest dollar)

Quizplus · Accepted Answer

The compensation expense for 2013 can be calculated as follows:
Number of options granted: 70 executives x 300 shares/executive = 21,000 shares
Total fair value of options granted: 21,000 shares x $16 fair value per share = $336,000
Portion of options expected to vest (assuming turnover rate of 2%): 70 executives x (1 - 2%) x 300 shares/executive = 20,580 shares
Compensation expense for 2013: ($336,000/3-year vesting period) x (20,580 shares/21,000 total shares) x 22% sales increase = $105,414 (rounded to nearest dollar). Therefore, the correct answer is B.

Exhibit 15-7 on January 1, 2013, 70 Executives Were Granted