Question

5. On October 1, 2015, the shareholders of C granted the CEO 10,000 stock options with a strike price of S20, the market price on the day the options were granted. The option exercise period begins in April of 2018 if he is still with the company and is for four years. The benefit period is two and a half years and the fair value is S300,000. Record the issuance of the stock options the recognition of the expense for 2015 and 2016, and the exercise of those options in June 12, 2018 when the market price was $36 under the fair value method

Answer 1

Hi...

The Accounting entries would be as follows:

                                                                                                            Debit             Credit

1/10/2015    Deferred Employee Compensation Plan          200,000

                        Employee Stock Options Outstanding                                      200,000

(Grant of 10,000 stock options at strike price of $20)

                        Stock option compensation expense                80,000

*APIC – stock options                                                                      80,000

(Stock option expense recorded for the year)

2016

                        Stock option Compensation expense               160,000

* APIC – stock options                                                                      160,000

            (Stock option recorded for the second year)

2018

                        Cash                                                                           360,000

*APIC – stock option                                                                        360,000

(CEO has exercise his option and purchased the shares at @ $36)

Working Notes:

*APIC – Additional Paid In Capital Account

Calculation of stock option compensation expense:

2015

Options expected to vest = 10,000

Compensation Cost          = 10,000 * $ 20 = $ 200,000

Vesting Period                    = 2.5 years

Service Period                     = 1 year

Cumulative expense at     = 200,000*1/2.5 = $ 80,000

the end of year 1   

2016

Options expected to vest = 10,000

Compensation Cost          = 10,000 * $ 20 = $ 200,000

Vesting Period                    = 2.5 years

Service Period                     = 2 year

Cumulative expense at     = 200,000*2/2.5 = $ 160,000

the end of year 2   

2018

Number of options exercised = 10,000

Exercised Price/ share               = $ 36

Amount paid for shares             = 10,000*36 = $ 360,000