[calicpa]

Can someone please explain how A is the correct answer?

On January 1, 2003, Gel Inc. granted a maximum of 900 stock options to selected employees. The options are exercisable beginning in 2007. The fair value of one option is estimated to be $2. The options vest based on the extent to which Gel’s sales increases from its 2002 base level:

500 shares vest if sales in 2006 increased 15% over 2002 sales

750 shares vest if sales in 2006 increased 25% over 2002 sales

900 shares vest if sales in 2006 increased 40% over 2002 sales

At December 31, 2003, Gel’s management anticipates: (1) no forfeitures, and (2) based on 2003 results, the firm will meet the 15% performance target.

At December 31, 2004, Gel’s management anticipates: (1) 5% total forfeitures, regardless of the performance target reached, and (2) based on 2004 results, the firm will meet the 25% performance target. Compute compensation expense for 2004.

A. $463

B. $250

C. $500

D. $361

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[NYCaccountant]

Originally they had estimated that of the 900 options issued that only 500 would vest. So the each option is worth $2, and the total expense is $1,000(500*2). Now we initially spread that expense over the vesting period, which would mean 1,000/4=250, so 250 each year. For the first two years the total expense is $500 (250*2), and then in the 3rd year we say that the the shares expectd to vest now will be 750 shares 750 *2=1,500 and over that 5% will be forfeited, which means they will not be exercised. So we take 5% of the options away from the total $750, which is 37.5. The total number of shares we expect to vest and be exercised is now 712.50 (750-37.5). 712.50 * $2 per option equals $1,425. So we have ti recognize an expense of 1,425 over the four years. We already recognized $500, so that leaves us with $925 over the last two years. 925/2=462.50, which when rounded gives you $463.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Originally they had estimated that of the 900 options issued that only 500 would vest. So the each option is worth $2, and the total expense is $1,000(500*2). Now we initially spread that expense over the vesting period, which would mean 1,000/4=250, so 250 each year. For the first two years the total expense is $500 (250*2), and then in the 3rd year we say that the the shares expectd to vest now will be 750 shares 750 *2=1,500 and over that 5% will be forfeited, which means they will not be exercised. So we take 5% of the options away from the total $750, which is 37.5. The total number of shares we expect to vest and be exercised is now 712.50 (750-37.5). 712.50 * $2 per option equals $1,425. So we have ti recognize an expense of 1,425 over the four years. We already recognized $500, so that leaves us with $925 over the last two years. 925/2=462.50, which when rounded gives you $463.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Topsya]

@NYCaccountant

When you say: For the first two years the total expense is $500 (250*2), and then in the 3rd year we say that the the shares expectd to vest now will be 750 shares

why is that “first 2 years”? What years are you referring to?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

@NYCaccountant

When you say: For the first two years the total expense is $500 (250*2), and then in the 3rd year we say that the the shares expectd to vest now will be 750 shares

why is that “first 2 years”? What years are you referring to?

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[calicpa]

thanks again NYCaccountant! good explanation

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

thanks again NYCaccountant! good explanation

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[NYCaccountant]

@ Topsya The options vest over a 4 year period from january 1, 2003 to December 31, 2006. So the first two years would be 2003 and 2004. The expect change does not take place until the very end of 2004, which basically means it has no effect on the expense for that year. At the end of year 4, you have 2 years left in the vesting plan.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

@ Topsya The options vest over a 4 year period from january 1, 2003 to December 31, 2006. So the first two years would be 2003 and 2004. The expect change does not take place until the very end of 2004, which basically means it has no effect on the expense for that year. At the end of year 4, you have 2 years left in the vesting plan.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Author]

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