Question

American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2018, that permit executives to acquire 10 million of the company’s $1 par common shares within the next five years, but not before December 31, 2019 (the vesting date). The exercise price is the market price of the shares on the date of grant, $55.50 per share. The fair value of the 10 million options, estimated by an appropriate option pricing model, is $13 per option. No forfeitures are anticipated. Ignore taxes.

Required: 1. Determine the total compensation cost pertaining to the options.

2. to 4. Prepare the appropriate journal entries.

Answer 1

1
Number of options granted	10
X Fair value of each option	13
Total compensation expense	130	million
2
Jan-1-2018
No journal entry required
3
Dec. 31. 2018
Compensation expense	65		=130/2
Paid-in capital—restricted stock		65
4
Dec. 31. 2019
Compensation expense	65		=130/2
Paid-in capital—restricted stock		65
Note: Paid-in capital—stock options may also be used instead of Paid-in capital—restricted stock