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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

Number of Options = 60000

Vesting period = Jan 1 2018 to Jan 1 2021 i.e 3 years

Total Employee Compensation Expense = 630000

Annual Employee Compensation Expense = 630000/3 = 210000

Journal entries in the books of AAA

Date Particulars Dr/Cr Amount Dr. Amount Cr.
Dec 31 2020 Employee Compensation Expense A/c Dr. 210000
To ESOP Outstanding A/c Cr. 210000
Dec 31 2020 Profit and Loss A/c Dr. 210000
To Employee Compensation A/c Cr. 210000

NOTE : In absence of any information it has been assumed that no options have lapsed and annual expense has been constant due to that.

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