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On January​ 1, Year​ 1, Gallagher Corporation issued 400 comma 000 stock options for 400 comma 000 shares to a division manager. The options have an estimated fair value of $ 10 each. These options are not exercisable unless division revenue increases by​ 8% in four years. Gallagher estimates that it is probable that the goal will be achieved. What is pretax compensation expense for year​ 1?g

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abiolataiwo2015

Answer:

$1,000,000

Explanation:

Gallagher Corporation

Stock option × Option estimated fair value /Numbers of years

Stock option $400,000

Option estimated fair value $10

Numbers of years 4

Hence:

($400,000 × $10) / 4 years

=$4,000,000/4years

= $1,000,000

Therefore pretax compensation expense for year 1 will be $1,000,000

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