Question

On January 1, 2019, Pepin Company adopts a compensatory share option plan for its 50 executives. The plan allows each executive to purchase 200 shares of its $2 par common stock for $30 per share after completing a 3-year service period. Pepin estimates the value of each option to be $14 on the grant date, and the company expects that 15% of the options will be forfeited and uses this rate in its compensation cost calculations in 2019. At the end of 2021, Pepin determined that the actual turnover was 7 executives for the entire service period. On January 6, 2022, 8 executives exercise their options.

Required:

1.	Prepare a schedule of Pepin’s compensation computations for its compensatory share option plan for 2019 through 2021.
2.	Prepare Pepin’s journal entries for 2019 through 2022 in regard to this plan.

Answer 1

Part 1

	2019	2020	2021
Estimated (Actual) Compensation Cost	119000	119000	120400
Fraction of service period expired	1/3	2/3	3/3
Estimated compensation to date	39667	79333	120400
Previously recognized compensation	0	(39667)	(79333)
Current compensation expense	39667	39666	41067

Estimated comp cost 2019 & 2020 = $14 x 50 executives x (100% - 15%) x 200 = $119,000

Estimated comp cost 2021 = $14 x (50 executives – 7 executives) x 200 = 120,400

Part 2

Date	Account titles and explanation	Debit	Credit
12/31/2019	Compensation expense	39667
	Paid-in capital from share options		39667
12/31/2020	Compensation expense	39666
	Paid-in capital from share options		39666
12/31/2022	Compensation expense	41067
	Paid-in capital from share options		41067
1/6/2023	Cash (8*200*30)	48000
	Paid-in capital from share options (8*200*14)	22400
	Common Stock (8*200*2)		3200
	Paid in capital in excess of par- common stock (balancing figure)		67200