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On January 1, 2018, AAA granted stock options for 60,000 shares of its $10 par value...

On January 1, 2018, AAA granted stock options for 60,000 shares of its $10 par value common
stock to its key employees. The market price of the common stock on that date was $23 per share
and the option price was $20. The Black-Scholes option pricing model determines total
compensation expense to be $630,000. The options are exercisable beginning January 1, 2021,
provided those key employees are still in AAA’s employ at the time the options are exercised. The
options expire on January 1, 2022. Prepare adjusting journal entries, if any, to recognize stock
options in 2020.

Business   Accounting   
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Answer #1

Total compensation expense of $630,000 has to be amortized over the vesting period( from1/1/2018 to 31/12/2020)

Employee benefits expense for each period will be 630000*1/3 = $210,000

Entry on 31/1/2020 will be

Employee Benefit expense 210000

Share-based payment reserve 210000

After 1/1/2021,

a)if the options will be exercised by the employees' entry will be

Share based payment reserve 630000

Cash(60000*20 ) 1200000  

Equity share capital (60000*10) 600000

Securities premium 1230000  

b)if the options will not be exercised by the employees' entry will be

Share based payment reserve 630000

retained earnings 630000

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