Question

Pearl Ltd. has an executive stock option plan, details of which follow: • The plan entitles the CEO to purchase 8,500 common shares at $25 each, following a vesting period. • The vesting period is January 1, 2020 through December 31, 2021. The exercise period is January 1, 2022 through December 31, 2022. • The CEO exercises 6,000 of the stock options on June 30, 2022. The rest of the options are allowed to lapse. • The shares' market prices per share are as follows: January 1, 2020 $25 December 31, 2020 $27 December 31, 2021 $28 June 30, 2022 $30 Pearl uses an option-pricing model to value the stock options. When granted, the options are estimated to have a fair value of $5 each. This estimate remains unchanged during the vesting period. Assuming that Pearl has a December 31 year end, prepare the required journal entries as at the following dates. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) (a) January 1, 2020 (grant date) (b) December 31, 2020 (c) June 30, 2022 (exercise date) (d) January 1, 2025 (lapse date)

Answer 1

Total Fair value of options (8,500*$5)	$   42,500
Vesting Period	2 Years
Amortization per Vesting Period (42500/2)	$   21,250

Date	Account Titles and Explanation	Debit	Credit
1-Jan-20	No Entry
31-Dec-20	Employee Benefit Expense Account	$   21,250
	Employee Stock Options Outstanding Account		$   21,250
	To record amortization for the year
30-Jun-22	Cash (6,000*$25)	$ 150,000
	Employee Stock Option Outstanding Account ($42500*6000/8500)	$   30,000
	Equity Share Capital Account		$   60,000
	Securities Premium Account		$ 120,000
	To record 6,000 options exercised
1-Jan-25	Employee Stock Options Outstanding Account	$   12,500
	Capital Reserve ($42,500-$30,000)		$   12,500
	To record 2,500 options lapsed