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Tuesday, 29 April 2014

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: