Question

E16

11B

(L0 3)

(Issuance, Exercise, and Termination of Stock Options)

On January 1, 2019, EZ Inc. granted stock options to

officers and key employees for the purchase of 250,000 shares of the company’s $1 par common stock at $86 per share. The options were exercisable within a 5-year period beginning January 1, 2021, by grantees still in the employ of the company, and expiring December 31, 2023. The service period for this award is 2 years. Assume that the fair value option pricing model determines total compensation expense to be $1,250,000. On July 1, 2019, 20,000 option shares were terminated when the employees resigned from the company. The market value of the common stock was $88 per share on this date. On March 31, 2021, 130,000 option shares were exercised when the market value of the common stock was $91 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2019, 2020, and 2021

Answer 1

No.	Date	General journal	Debit	Credit
1	January 1, 2019	No journal entry required
2	December 31, 2019	Compensation Expense (1250000/2)	625000
		Paid-in Capital-Stock Options		625000
3	July 1, 2020	Paid-in Capital-Stock Options (625000*20000/250000)	50000
		Compensation Expense		50000
4	December 31, 2020	Compensation Expense (625000-50000)	575000
		Paid-in Capital-Stock Options		575000
5	March 31, 2021	Cash (130000*86)	11180000
		Paid-in Capital-Stock Options (1250000*130000/250000)	650000
		Common Stock (130000*1)		130000
		Paid-in Capital in Excess of Par - Common Stock		11700000