Question

Rambling Man, Inc. has a stock-option plan for top management. Each stock option represents the right to purchase a share of Rambling Man $1 par value common stock in the future at a price equal to the fair value of the stock at he date of the grant. On January 1, 2018, Rambling Man issued the following options:

Number of options granted

55,000

Market price of stock at grant date

42

Fair value of options at grant date

7

Service period

5

years

Options expire at the end of December, 2025.

During 2020, several executives terminated their employment with the company and forfeited their options, as follows:

Forfeitures experienced due to employee departures

18%

In 2024, the percentage of remaining options were exercised by the executives was:

75%

Required:

1.

Record the journal entry at the end of 2025 when all remaining options expire.

Answer 1

Journal entry at the end of 2025 when all remaining options expire:

Journal in the books of Rambling Man, Inc.
Date	Particulars	Debit	Credit
		Amount	Amount
		($)	($)
31-12-25	Employee Stock Options Outstanding (11,275 x 35)	394,625
	To General Reserve		394,625
	(Being Employee Stock option Outstanding A/c on the lapse of 11,275 options at the end of the exercise of options period transferred to general reserve A/c)

Workings:

NUMBER OF STOCK OPTIONS EXPIRED
Total Number of Stock Options	55,000
Less: Options Forfeited at the end of 2020	9,900	(55,000 x 18%)
Number of Remaining options vested to be exercised before the expiry of options	45,100
Less: Number of Options Exercised in 2024 (In 2024, the percentage of remaining options were exercised by the executives was: 75%)	33,825	(45,100 x 75%)
Number of Options left, Expired at the end of 2025	11,275	(45,100 - 33,825)

EXPENSE ON OPTIONS EXPIRED TO BE REVERSED
Market Price of Stock at Grant Date	42
Less: Fair Value of Option	7
Expense per option recognized by the company during 5 Years of Service Period	35
Number of options Lapsed at the end of 2025	11,275
Expense recognized on Options which are lapsed	394,625	(11,275 x 35)

Regards