Question

Wall drugs offered an incentive stock option plan to its employees. On January 1, 2018, options were granted for 60,000 common share (par value $0.01). The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2021, and expire on December 31, 2022. Each option has a fair value of $1 based on an option-pricing model.

a. Provide the journal entry required for January 1, 2018. Write no entry if unnecessary.

b. Provide the journal entry for exercises of 90% of the options at a market price of $8 on December 31, 202 Write no entry if unnecessary.

c. Provide the journal entry for the expiration of the remaining 10% of the option on January 1, 2023. Write no entry if unnecessary.

d. What is the total compensation COST for this plan?

Answer 1

Date	Account	Debit	Credit
01-01-18	No entry required on grant date
31-12-22	Share Based Payment Reserve(60000*1*90%)	54000
	Bank (60000*5*90%)	270000
	Common Stock(60000*0.01)		600
	Additional Paid in Capital		323400
	(To record exercise of options)
01-01-23	Share Based Payment Reserve(60000*1*10%)	6000
	Retained earnings		6000
	(To reverse ESOP expense on unexercised options)

d) Total Compensation for this plan = no.of options*Fair value of option

= 60000*1 = $60000