On January 1, 2009, Red Inc

Multiple Choice

On January 1, 2009, Red Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is reduction in earnings in 2009?

A) $ 0
B) $ 200,000
C) $ 400,000
D) $1,200,000 The estimate of the total compensation would be:
200,000 $6 = $1,200,000
One-third of that amount, or $400,000, will be recorded in each of the three years.