Question

Prepare the necessary entries from January 1, 2014 to February 1, 2016 for the following events. If no entry is needed, write "No entry necessary."

1.   On January 1, 2014, the shareholders of Musetta Inc. adopted a stock option plan for its top executives, where each could receive rights to purchase up to 3,000 common shares at $40 per share. At this date, the shares were trading for $32 per share.

2.   On February 1, 2014, options were granted to five executives to purchase 3,000 shares each. The options can be exercised after February 1, 2016 and expire in 2020. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. It is assumed that the options were for services performed equally in 2014 and 2015. The Black-Scholes option pricing model determined total compensation expense to be $390,000.

3.   On February 1, 2016, four executives exercised their options.

Answer 1

1. January 1, 2014No entry necessary.

2. February 1, 2014

No entry necessary.

December 31, 2014
Compensation Expense ($390,000 ÷ 2) 195,000

Contributed Surplus—Stock Options 195,000

December 31, 2015

Compensation Expense 195,000

Contributed Surplus—Stock Options 195,000

3. February 1, 2016

Cash (4 × 3,000 × $40) 480,000

Contributed Surplus—Stock Options ($390,000 × 4 ÷ 5) 312,000

Common Shares 792,000

Contributed Surplus—Stock Options ($380,000 – $312,000) 78,000

Contributed Surplus—Expired Stock Options 78,000