Question

LCI Cable Company grants 1 million performance stock options to key executives at January 1 2018. The options entitle executives to receive 1 million of a $1 par common shares, subject to the achievement of specific financial goals over the next four years Attainment of these goals is considered probable initially and throughout the service period. The options have a current fair value of $12 per option Required: 1. & 2. Record the necessary journal entries 3. Suppose at the beginning of 2020, LCI decided it is not probable that the performance objectives will be met. Prepare the appropriate entries on December 31 of 2020 and 2021 Complete this question by entering your answers in the tabs below. Req 1 and 2 Record the necessary journal entries. (If neerkry is required for a transaction event select "No journal entry required in the first account field. Enter your answers in millions (ie, 10,000,000 should be entered as 10).)

Answer 1

Answer:

1 to 2)

Date	Particulars	Debit ($)	Credit ($)
	No entry required
31-Dec-2018	Compensation Expense	$3,000,000
	Paid-in-capital-Stock options		$3,000,000
	(To record compensation expense)
31-Dec-2019	Compensation Expense	$3,000,000
	Paid-in-capital-Stock options		$3,000,000
	(To record compensation expense)
31-Dec-2020	Compensation Expense	$3,000,000
	Paid-in-capital-Stock options		$3,000,000
	(To record compensation expense)
31-Dec-2021	Compensation Expense	$3,000,000
	Paid-in-capital-Stock Options		$3,000,000
	(To record compensation expense)

3.)
Estimated compensation cost of options = (Fair market value per share x Number of options expected to vest)
=$12 x 0 shares

Date	particulars	Debit ($)	Credit ($)
31-Dec-2020	Paid-in-capital-Stock options	$6,000,000
	Compensation Expense		$6,000,000
	(To record compensation expense)
31-Dec-2021	No Entry Required

Working Notes:

Total compensation cost of stock options = Estimated fair market value of the option x Number of options granted
=$12 x 1,000,000 shares
=$12,000,000

Expense allocated each year = Total compensation cost of stock options/Vesting period
=$12,000,000/4 years
=$3,000,000