Question

Under its executive stock option plan, National Corporation granted 18 million options on January 1, 2018, that permit executives to purchase 18 million of the company’s $1 par common shares within the next six years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, $15 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. Suppose that the options are exercised on April 3, 2021, when the market price is $21 per share.

Ignoring taxes, what journal entry will National record?

Answer 1

Total Compensation Expense = Options granted*Fair value per option

= 18 million*$2 per option = $36 million

The total compensation expense of $36 million will be equally recognized as an expense over three years (i.e. from 2018 to 2020).

Compensation Expense to be recognized each year = $36 million/3 yrs = $12 million

Journal Entries (Amounts in million $)

Date	Account Titles	Debit	Credit
Dec 31, 2018	Compensation Expense	12
	Paid in Capital-Stock Options		12
	(To record compensation expense
Dec 31, 2019	Compensation Expense	12
	Paid in Capital-Stock Options		12
	(To record compensation expense
Dec 31, 2020	Compensation Expense	12
	Paid in Capital-Stock Options		12
	(To record compensation expense
Apr 3, 2021	Cash (18 million*$15)	270
	Paid in Capital-Stock Options	36
	Common Stock (18 million*$1 par)		18
	Paid in Capital-in excess of par (Bal. fig) (270+36-18)		288
	(To record exercise of options)

* The market price on the date of exercise is irrelevant.