Question

The Burford Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2016, that permit executives to acquire 12 million of the company's $1 par value common shares within the next five years, but not before December 31, 2019 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Required:

(1.) Determine the total compensation cost pertaining to the options. Show calculations.
(2.) Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2016.
(3.) Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2016.  

Answer 1

1

Total compensation expense = (Number of options granted X Fair value of per option)
=> (12 million shares X $3 per option)
=> $36 million (Ans)

2 & 3

No.	Date	Particulars	Debit ($) (millions)	Credit ($) (millions)
2		NO JOURNAL ENTRY (No journal entry needed when options are granted)
3	December 31, 2016	Compensation expense (36 million / 4 years)	9
		To Paid in capital- stock options		9
		(Being record of compensation expense)

Vesting period is 4 years (January 1, 2016 to December 31, 2019), so compensation expense will be evenly distributed over the vesting period and recorded appropriately

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