Question

Pris Inc. granted options for one million shares of its $1 par common stock at the beginning of the current year. the exercise price is $35 per share, which was also the market value of the stock on the grant date. The value of the options was estimated at $4 per options.

1- what would be the total compensation indicated by these options?

2- if the options have a vesting period of four years, what would be the balance in "paid-in capital - stock options" two years after the grant date?

3- only half of the entire options were exercised after the four year vesting period. Prepare the journal entry to reflect this event.

only half of the entire options were exercised after the four year vesting period. Prepare the journal entry to reflect this event.

Answer 1

Solution:

Total compensation indicated by these options = Number of options * Value of Option

= One Million * $4 per option

= $4,000,000

If the vesting period of option is 4 years then total option value ($4,000,000) is taken paid in capital - stock option account over the period. For 2 years we will proportionate the value = (Total Option Value * Vesting period ) / Total vesting period

= ($4,000,000 * 2year) / 4years

= $2,000,000

When half of option exercise after 4 years

Number of option exercise = half of 1,000,000

= 500,000

Common Stock = 500,000 8 $1 = $500,000

APIC - Common Stock = 500,000 * ($35 - $1) = $17,000,000

Accounting Entry:

Account Title	Debit	Credit
Cash	$17,500,000
Common Stock		$500,000
APIC - Common Stock		$17,000,000

*APIC = Additional paid in Capital