On january 1, 2018, red inc. issued stock options for 280,000 shares to a division manager. the options have an estimated fair value of $5 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 compensation expense for 2018? (round your answer to the nearest dollar amount.)

$466,667

Explanation:

Compensation expenses for 2018 should be computed as follows:

Fair value of each option = $5

Number of stock options issued = 280,000

Therefore,

Total compensation expense = $5 x 280,000

                                                 = $1,400,000

And,

Number of years for which the compensation expense would be recognized = 3

Thus,

Compensation expense for 2018:

= Total compensation expense ÷ Number of years

= $1,400,000 ÷ 3

= $466,667

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