Question

ABC Company grants the company’s top 5 executives stock options for a total of 10,000 shares ($1 par) with a current FMV of $60 and an option price of $50. Using an acceptable fair value option pricing model, the total compensation expense is $200,000 and the allocation period is 2 years.

a) Prepare the journal entry at the grant date:

b) Prepare the journal entry at the end of Year 1 to record compensation expense:

c) Prepare the journal entry at the end of Year 2 to record compensation expense:

d) Prepare the journal entry in Year 3 at the exercise of 2,000 (20%) of the options:

Extra credit:(2 points) 1) Using the information provided in Problem 15, prepare the journal entry in Year 3 at the expiration of the remaining 8,000 options, assuming all employees satisfied employment requirements.

Answer 1

Total compensation expense = $200,000
Allocation period = 2 years
Compensation expense per year = 200000/2 = $100,000

a. The stock options do not affect the common stock and Additional paid-in-capital at the grant date. so nothing is nothing to b recorded.

b. Stock Option Compensation expense Dr. $100,000
To Additional Paid-in-capital stock Options $100,000

c. Stock Option Compensation expense Dr. $100,000
To Additional Paid-in-capital stock Options $100,000

d. No. of options exercised = 2000
Option Price per share = $50
Amount paid for shares = 2000 * $50 = $100,000

Cash Dr.      $100,000
Additional Paid-in-capital Dr. $40,000
To Common Stock $2,000
To additional paid-in-capital stock options $138,000

The business receives cash of $100000 and since the par value of shares is $1, common stock is allocated $2000 and balance in additional paid-in-capital.