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, 2021. The options permit holders to acquire 8 million of the company's $1 par common shares for $26 within the next six years, but not before January 1, 2024 (the vesting date). The market price of the shares on the date of grant is $28 per share. The fair value of the 8 million options, estimated by an appropriate option pricing model, is $7.80 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, 2021, 2022, and 2023. Record the exercise of the options if all of the options are exercised on May 11, 2025, when the market price is $29 per share.

Answer 1

Jan 1 total compensation is measured as Fair value per option (a) = $7.80 Options granted (b) = 8 million Total compensation (a*b) = 62.4 million 2) & 3) Compensation expense = $62.4/3years = $20.8 million Cash = $26 exercise price * 8 million shares = $208 million Paid in capital stock options = $20.8 million*3 years = $62.4 million = $8 million Common stock (8 million shares at $1 par per share)

А 1 Date Particulars 2 31-12-2021 Compensation expense Paid in capital stock Debit($) Credit($) 20.8 20.8 20.8 m #moro 31-12-2022 Compensation expense Paid in capital stock 20.8 20.8 20.8 8 31-12-2023 Compensation expense Paid in capital stock 10 11 11-05-2025 Cash Paid in capital stock options 13 Common stock 14 Paid in capital excess of par 15 208 62.4 12 LI 262.4)