Question

SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2018. The options permit holders to acquire 10 million of the company’s $1 par common shares for $24 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares on the date of grant is $26 per share. The fair value of the 10 million options, estimated by an appropriate option pricing model, is $7.2 per option. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2. & 3. Prepare the appropriate journal entries to record compensation expense on December 31, 2018, 2019, and 2020. Record the exercise of the options if all of the options are exercised on May 11, 2022, when the market price is $27 per share.

Answer 1

1) Calculation of Total Compensation Cost :-

= Option Granted * Fair Value Per Option

= 10 million * $7.2

= 72 million

2) Journal Entries :-

Date	Particulars	Debit($)	Credit($)
Dec 31, 2018	Compensation Expense A/c Dr. ($72 million / 3 yr)	24 million
	To Paid in Capital - Stock Options A/c		24 million
Dec 31, 2019	Compensation Expense A/c Dr.	24 million
	To Paid in Capital - Stock Options A/c		24 million
Dec 31, 2020	Compensation Expense A/c Dr.	24 million
	To Paid in Capital - Stock Options A/c		24 million

3) Journal Entry :- (Option Exercised at Exercise price)

Particulars	Debit($)	Credit($)
Cash A/c Dr.(10 million share * $24 exercise price)	240 million
Paid in Capital - Stock Option a/c Dr. ($24 million * 3 yr)	72 million
To Common Stock A/c (10 million shares * $1)		10 million
To Paid in Capital- Excess of Par (Bal./F)		302 million