Stock Compensation: Prime went public in 2005and experienced a continued increase in stock prices through 2007.With the sustained growth of the business and rising stock price,Prime developed a practice of granting annual stock option awardsto its executives at the beginning of each year.
On January 1, 2008, Prime granted 1,000 employee share optionsthat vest after a four-year service period, with an exercise priceof $30 per share. Using the Black-Scholes pricing model, it wasdetermined that the grant-date-fair-value-based measure of eachoption was $15. On the grant date, Primeâs stock was trading at $30per share.
On January 1, 2010, Prime decided to change the terms of theincentives for the third and fourth years of service of the 2008annual grant by modifying the exercise price to $20 per share.Using the Black-Scholes pricing model, management determined thatthe fair-value-based measure of the awards as of January 1, 2010was $9 before the terms of the award were modified and $12immediately after modification. The modification did not affect anyof the other terms or conditions of the awards. (No forfeitures areassumed.)
(1) How much compensation cost should Prime recognize in eachyear of the awardâs service period?
(2) How would the accounting for the awards change if themodification to the terms of the award was made on January 1, 2014,after the awards have become fully vested?
Stock Compensation: Prime went public in 2005and experienced a continued increase in stock prices through 2007.With the sustained growth of the business and rising stock price,Prime developed a practice of granting annual stock option awardsto its executives at the beginning of each year.
On January 1, 2008, Prime granted 1,000 employee share optionsthat vest after a four-year service period, with an exercise priceof $30 per share. Using the Black-Scholes pricing model, it wasdetermined that the grant-date-fair-value-based measure of eachoption was $15. On the grant date, Primeâs stock was trading at $30per share.
On January 1, 2010, Prime decided to change the terms of theincentives for the third and fourth years of service of the 2008annual grant by modifying the exercise price to $20 per share.Using the Black-Scholes pricing model, management determined thatthe fair-value-based measure of the awards as of January 1, 2010was $9 before the terms of the award were modified and $12immediately after modification. The modification did not affect anyof the other terms or conditions of the awards. (No forfeitures areassumed.)
(1) How much compensation cost should Prime recognize in eachyear of the awardâs service period?
(2) How would the accounting for the awards change if themodification to the terms of the award was made on January 1, 2014,after the awards have become fully vested?
