Question

On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.2 million stock options to key executives exercisable for 1.2 million shares of the company’s common stock at $24 per share. The stock options are intended as compensation for the next three years. The options are exercisable within a four-year period beginning January 1, 2021, by the executives still in the employ of the company. No options were terminated during 2018. The market price of the common stock was $28 per share at the date of the grant. HMCC estimated the fair value of the options at $6 each. 1% of the options are forfeited during 2019 due to executive turnover.

What amount should HMCC record as compensation expense for the year ended December 31, 2019, assuming HMCC chooses the option to record forfeitures as they actually occur?

Answer 1

Hugh Morris Comedy Club granted 1.2 Million Stock Options to its employees on 01.01.2018 with a vesting period of 3 years and exercise period of 4 years, carrying an fair value of $6 per option. Although there is no option lapsed in 2018, 1% lapsed in 2019. At first we will calculate compensation expense for 2018, amounting to $2.4 Million, and then we will compute the same for 2019, keeping in mind that 1% has been lapsed, i.e. 0.012 Million, compensation expense amounting to $4.752 Million, which is the compensation expense for 2 years less $2.4 Million for 2018, I.e. $2.352 Million.

Solution: Hugh Morris Comedy Club (Himce) Aranded 1.2 million stock Ophism to The key executives on 01.01.2018 stock. Ob bons are intended on Compematon for the next 8 yeaos, le 31.12.2020, and exercicable within A years, jė. 01.01.2001 to 31.12.2024 HMCC eshimated Lois value of the options at $6 each The bowoblem hos fastheo brovided that although thenennene no obbons terminated during 2018, there was a 1 Ophions for feitame deving 2019 derato executive turnover. First, we need to knoco the comberation expense for the year ended 31.12.2018 Amnend of Combemation - No.of ob tema x Pais Value x Time feried Here we are going to compute campemation Expeme fres llis first year out of this three year Vesting period. So, the time bented at forella final year, v. Combemation Frbeme fos 2018 - $ (1.2Million x 6 x 3) $ .4 Million Here, we meedilo remember that the Combemembim Exbeme to calculated in a Cumulative manner letun nou combule Combemannian Fabeme for 2019. No. of obtiem - 1.2 million x (100-0,2 14, 17. abhion for feitconce during 2013] 1.188 Million Fair value $6. Time Period : % (As itialle and years The 2nd year) .: Compemahiom Exbeme fom 2019 = $(1.188 x 6x) - 2,4 Million 5.2.952 Million t we compute as $ (1:188X6X . $4.752 Million, it will give us Combemation Belence for 2 year, 1.1. 2018 and 2019. As we have alredy already computed Our Combemahon Expeme for 2018, 1:4 $2.4 Million, bera Carmbemidom Babeme for 2019 in '- $14.750 - $3.4) Million $2.852 Million Aransex: Comberackiem Expense to be recognized by Hugh Morris Comedy Club HMCC) for the year ending on 21st December, 2015 vitube $2.359 Million