Question

On January 1, 2018, Larkspur Inc. granted stock options to officers and key employees for the purchase of 18,000 shares of the company’s $10 par common stock at $23 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $368,000.

On April 1, 2019, 1,800 options were terminated when the employees resigned from the company. The market price of the common stock was $34 per share on this date.

On March 31, 2020, 10,800 options were exercised when the market price of the common stock was $42 per share.

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020

Answer 1

ANSWER

Date general journal a Debit Credit January 1 2018 No entry $ 184,000 December 31 2018 compensation expense ($ 368,000/2years) Paid in Capital - stock option (to record compensation expense for 2018) $ 184,000 April 1 2019 $ 18,400 Paid in Capital - stock option compensation expense (184,000 x 1800/18000) (to record options terminated) $ 18,400 $ 165,600 $ 165,600 December 31 2019 compensation expense ($ 368,000 x 16200/18000) /2 years Paid in Capital - stock option (to record compensation expense for 2018) * 18000 -1800 = 16200 March 31 2020 $ $ 248,400 220,800 Cash (10,800 x 23) Paid in Capital - stock option ( $ 368,000 x 10800/18000) Common stock ( 10,800x10) Paid in capital in excess of par ( balancing figure) $ $ 108,000 361,200 ** un exercised option = 18000 -1800 - 10800 = 5400

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