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 21 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, $20.50 per share. The fair value of the 21 million options, estimated by an appropriate option pricing model, is $4 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. Total Compensation Cost = 21 Million Options x $4 = $ 84 Million

2. No Journal Entry Required for the award of options on Grant date

3. Below is the record of compensation cost as on 31st December 2018

	Debit	Credit
Compensation expense	$    42 Million
Paid in capital - restricted stock		$    42 Million

4) Below is the record of compensation cost as on 31st December 2019

	Debit	Credit
Compensation expense	$    42 Million
Paid in capital - restricted stock		$    42 Million