Question

On January 1, 2021, Adams-Meneke Corporation granted 120 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, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $42 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option. Management’s policy is to estimate forfeitures. No forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options on January 1, 2021.

2. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.

3. Unexpected turnover during 2022 caused an estimate of the forfeiture of 10% of the stock options. Prepare the appropriate journal entry(s) on December 31, 2022 and 2023 in response to the new estimate.

Answer 1

Part 1

Options granted	120	Millions
Multiply: Estimated fair value per option	$             3
Total Compensation Expense (Answer 1)	$        360	Millions
Divided by: Number of years in vesting period (2021,2022, and 2023)	3	Years
Compensation expense for the stock option plan in 2021.	$        120	Millions

Part 2

Amounts are expressed in millions $.
Date	General journal	debit	Credit
December 31, 2021	Compensation expense	$        120
	Paid in capital – stock options		$        120
	(To record Compensation expense.)

Part 3

Percentage of option forfeited (100%-10%)

90%

Cumulative Compensation expense Up to Year 2022 (360*90%*2/3)			$        216
Less: recognized in earlier year (Answer 2)			$        120
Compensation expense For Year 2022			$          96
Cumulative Compensation expense Up to Year 2023 (360*90%*3/3)			$        324
Less: recognized in earlier year			$        216
Compensation expense For Year 2023			$        108

Amounts are expressed in millions $.
Date	General journal	debit	Credit
December 31, 2022	Compensation expense	$          96
	Paid in capital – stock options		$          96
	(To record Compensation expense.)
December 31, 2023	Compensation expense	$        108
	Paid in capital – stock options		$        108
	(To record Compensation expense.)