Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2011, the company issued 400,000 executive stock options permitting executives to buy 400,000 shares of Pastner stock for $34 per share. One-fourth of the options vest in each of the next four years beginning at December 31, 2011 (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, 2011, as follows:
Vesting Amount Date Vesting
Dec. 31, 2011 25% Dec. 31, 2012 25% Dec. 31, 2013 25% Dec. 31, 2014 25%
Fair Value per Option
$3.50 $4.00 $4.50 $5.00
Required:
1. Determine the compensation expense related to the options to be recorded each year 2011-2014, 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 2011-2014, assuming Pastner uses the straight-line method to allocate the total compensation cost.
Refer to the situation described in Problem 19-2. Assume Pastner measures the fair value of all options on January 1, 2011, to be $4.50 per option using a single weighted-average expected life of the options assumption.