Question

E16.10 (LO 3) (Issuance and Exercise of Stock Options) On November 1, 2020, Columbo Com- pany adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company's $10 par value common stock. The options were granted on January 2, 2021, and were exer- cisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $40, and the fair value option pricing model determines the total compensation expense to be $450,000. All of the options were exercised during the year 2023: 20,000 on January 3 when the market price was $67, and 10,000 on May 1 when the market price was $77 a share. Instructions Prepare journal entries relating to the stock option plan for the years 2021, 2022, and 2023. Assume that the employee performs services equally in 2021 and 2022. Prepare the entries for 2023 and 2027, assuming instead that 90% of the options were exercised on 1/3/23 and the remainder expired on 1/1/27)

Answer 1

i)

Date	Particulars	LF	Debit	Credit
02-01-21	No entry on grant of options
31-12-21	Employees Compensation A/c ----------                   Dr		225000
	To Employee stock option A/c			225000
	( Being compensation expenses recognized in respect of 30000 options granted to key executives at a discount of $15each , amortised on straight line basis over 2 years)
31-12-21	P & l A/c   ----------------------------                                 Dr		225000
	To Employees Compensation A/c			225000
	( Being employee compensation expe. transferred to P&l A/c)
31-12-22	Employees Compensation A/c ----------                   Dr		225000
	To Employee stock option A/c			225000
	( Being compensation expenses recognized in respect of 30000 options granted to key executives at a discount of $15each , amortised on straight line basis over 2 years)
31-12-22	P & l A/c   ----------------------------                                 Dr		225000
	To Employees Compensation A/c			225000
	( Being employee compensation expe. transferred to P&l A/c)
03-01-23	Bank A/c    ------------------------------                            Dr		800000
	To Equity Share Capital A/c			200000
	To Securities Premium A/c			600000
	( Being exercise of 20000 stock options at an exercise price of $40)
01-05-23	Bank A/c    ------------------------------                            Dr		400000
	To Equity Share Capital A/c			100000
	To Securities Premium A/c			300000
	( Being exercise of10000 stock options at an exercise price of $40)
01-05-23	Employee Stock Options A/c -----------                       Dr		450000
	To Securities Premium A/c			450000
	( Being balance in Employee stock option A/c is transferred to Securities premium A/c)

ii) If 90% of stock options were exercised , & remaining lapsed then journal entry on 01/03/2023 & remainder will be expired on 1/1/2027

01-03-23	Bank A/c    ------------------------------                            Dr		1080000
	To Equity Share Capital A/c			270000
	To Securities Premium A/c			810000
	( Being exercise of10000 stock options at an exercise price of $40)
01-03-23	Employee Stock Options A/c -----------                       Dr		405000
	To Securities Premium A/c			405000
	( Being balance in Employee stock option A/c is transferred to Securities premium A/c)
01-01-27	Employee Stock Options A/c -----------                       Dr		45000
	to Employee Compensation Expenses A/c			45000
	( Being reversed entry passed as 3000 options were not exercised)
31-12-27	Employee Compensation Expenses A/c -------        Dr		45000
	To P& L A/c			45000
	( Being reversed entry passed as 3000 options were not exercised)