Question

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.

Answer 1

SOLUTION :

Date	General Journal	Debit $	Credit $
31-12-20	Employee Benefit Expenses	210000.00
	Stock Based Payement Reserve (Equity)		210000.00
	(Being SBP Expense for the year 2020 recognized)
31-12-20	Retained Earnings	210000.00
	Employee Benefit Expenses		210000.00
	(Being Expenses closed and transferred to RE)

NOTES :

Total option expenses to be recognized as per Black Scholes model is $ 630000. This will be amortized to Retained Earnings over the vesting period, ie. 3 years. Since 2020 is the third year, the expense recognition entry at $ 210000 (63000 / 3) will be passed.