Question

On January 1, 2016, Adams-Meneke Corporation granted 60 million incentive stock options to division managers, each permitting holders to purchase one share of the company’s $1 par common shares within the next six years, but not before December 31, 2018 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $36 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Required:

1. Determine the total compensation cost pertaining to the options on January 1, 2016. (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).) Prepare the appropriate journal entry to record compensation expense on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Prepare the appropriate journal entry to record compensation expense on December 31, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Unexpected turnover during 2017 caused the forfeiture of 5% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2017 and 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).)

Answer 1

Determine the total compensation cost pertaining to the options on January 1, 2016.

Number of Stock Options x Fair Value of Option

60m x $5 = $300 m vested over 3 years

Prepare the appropriate journal entry to record compensation expense on December 31, 2016.

2016 Compensation Cost $300 m x 1/3 = $100 m

General Journal	Debit	Credit
Compensation Expense	100 m
PIC- Restricted Stock		100 m

Unexpected turnover during 2017 caused the forfeiture of 5% of the stock options.

New Total Compensation = Total Compensation x Forfeiture Rate

= $300 m x 95% = 285m

2017

Compensation Cost (300 m x 95%) x 2/3 – 100 m = $90 m

2018

(300 m x 95%) x 3/3 – 100 m - $90 m= 95 m