Question

2. Determine the compensation expense related to the options to be recorded each year 2016-2019, assuming Pastner uses the straight-line method to allocate the total compensation cost. 2016 2017 2018 2019 Total Compensation expense Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2016, the company issued 560,000 executive stock options permitting executives to buy 560,000 shares of Pastner stock for $42 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2016 (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, 2016, as follows Vesting Date Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Amount Fair Value Vesting per Option 25% 25% 25% 25% $4.30 $4.80 $5.40 $5.80 Required: 1. Determine the compensation expense related to the options to be recorded each year 2016-2019, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately Shares Compensation Expense Recorded in: 2016 2017 2018 2019 Vesting at Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 0 S 0 S Total

Answer 1

Pastner Brands 1.Determine the compensation expense related to the options to be recorded each year 2016-2019 assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately Vesting Date Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Number Vesting Fair Value Option Compensation cost 140000 140000 140000 140000 560000 602000 672000 756000 812000 2842000 4.8 Compensation expense for each year is shown above. Total Compensation expense is $2842,000 The compensation cost for each year is allocated as below. The allocation made below meets the requirement that company should atleast recognize the amount vested by due date So Amount of $1393,000 recognised in 2013 exceeds the amount vested $602,000 Similarly amount of $702,000 recognised in 2014 exceeds the amount vested (602,000+672,000-) $1274,000 & so on Shares Compensation Expense Recorded in: Vesting at: 2016 602000 336000 252000 203000 1393000 2017 2018 2019 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 Total 336000 252000 203000 791000 252000 203000 455000 203000 203000 2.Determine the compensation expense related to the options to be recorded each year 2016-2019, assuming Pastner uses the straight-line method to allocate the total compensation cost. Using straight line method, the total compensation expense of $2522,000 is allocated equally over 4 year as 2842,000/4 $710,500 per annum 2016 2017 2018 2019 Total Compensation expense 710500 710500 710500 710500 2842000