Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2013, 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, 2013 (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, 2013, as follows:

Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2013, 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, 2013 (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, 2013, as follows:

Vesting Date	Amount Vesting			Fair Value per Option
Dec. 31, 2013		25	%	$	3.50
Dec. 31, 2014		25	%	$	4.00
Dec. 31, 2015		25	%	$	4.50
Dec. 31, 2016		25	%	$	5.00

Required:
1.	Determine the compensation expense related to the options to be recorded each year 2013–2016, assuming Pastner allocates the compensation cost for each of the four groups (tranches) separately.

	Compensation Expense Recorded in:
Shares
Vesting at:	2013	2014	2015	2016
Dec. 31, 2013	$
Dec. 31, 2014		$
Dec. 31, 2015			$
Dec. 31, 2016				$
	$	$	$	$
Total				$

2.	Determine the compensation expense related to the options to be recorded each year 2013–2016, assuming Pastner uses the straight-line method to allocate the total compensation cost.

	2013	2014	2015	2016	Total
Compensation expense	$	$	$	$	$

Explanation:

1.

We treat each individual vesting date as a separate award:

Vesting Date	Number Vesting		Fair Value per Option			Compensation Cost
Dec. 31, 2013	100,000		$	3.50		$	350,000
Dec. 31, 2014	100,000		$	4.00			400,000
Dec. 31, 2015	100,000		$	4.50			450,000
Dec. 31, 2016	100,000		$	5.00			500,000
						$	1,700,000

Also, a company must have recognized at least the amount vested by that date. The allocation here meets that constraint:

•	The $825,000 recognized in 2013 exceeds the $350,000 vested.
•	The $1,300,000 ($825,000 + 475,000) recognized by 2014 exceeds the $750,000 ($350,000 + 400,000) vested by the same time.
•	The $1,575,000 ($825,000 + 475,000 + 275,000) recognized by 2015 exceeds the $1,200,000 ($350,000 + 400,000 + 450,000) vested by the same time.

2.

Companies are allowed to use the straight-line method. The $1,700,000 total compensation cost is allocated equally to 2013, 2014, 2015, and 2016 at $425,000 per year. Also, a company must have recognized at least the amount vested by that date. The straight-line allocation meets that constraint:

•	The $425,000 recognized in 2013 exceeds the $350,000 vested.
•	The $850,000 ($425,000 + 425,000) recognized by 2014 exceeds the $750,000 ($350,000 + 400,000) vested by the same time.
•	The $1,275,000 ($425,000 + 425,000 + 425,000) recognized by 2015 exceeds the $1,200,000 ($350,000 + 400,000 + 450,000) vested by the same time.