Pastner Brands is a calendaryear firm with operations in sev

Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company issued 420,000 executive stock options permitting executives to buy 420,000 shares of Pastner stock for $35 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2018 (graded vesting). Pastner elects to separate the total award into four groups (or tranches) according to the year in which they vest and measures the compensation cost for each vesting date as a separate award. The fair value of each tranche is estimated at January 1, 2018, as follows: Vesting Date Amount Vesting Fair Value per Option Dec. 31, 2018 25 % $ 3.60 Dec. 31, 2019 25 % $ 4.00 Dec. 31, 2020 25 % $ 4.40 Dec. 31, 2021 25 % $ 5.60 Required: 1. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately. 2. Determine the compensation expense related to the options to be recorded each year 2018–2021, assuming Pastner uses the straight-line method to allocate the total compensation cost.

Solution

1 Shares Compensation expense recorded Vesting at 2018 2019 2020 2021 Dec 31 2018 378000 378000 Dec 31 2019 210000 210000 420000 Dec 31 2020 154000 154000 154000 462000 Dec 31 2021 147000 147000 147000 147000 588000 Total 889000 511000 301000 147000 1848000 2 Straight line method 2018 2019 2020 2021 Compensation expense 462000 462000 462000 462000 1848000