Question

Problem 19-6 Stock option plan; deferred tax effect of a nonqualifying plan [LO19-2] JBL Aircraft manufactures and distributes aircraft parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan. JBL granted options to key officers on January 1, 2018. The options permit holders to acquire 6 million of the company's $1 par common shares for $30 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares on the date of grant is $34 per share. The fair value of the 6 million options, estimated by an appropriate option pricing model, is $7 per option. Because the plan does not qualify as an incentive plan. JBL will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The tax rate is 40%. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2. & 3. Record the necessary journal entries on December 31, 2018, 2019, and 2020. Assume all of the options are exercised on August 21, 2022, when the market price is $35 per share. Complete this question by entering your answers in the tabs below. Reg 1 Req 2 and 3 Determine the total compensation cost pertaining to the incentive stock option plan. (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).) Total compensation cost million < Reqi Req 2 and 3 >

Answer 1

Arswer Page. No @ O Total compensation cost of stock options to Aircrabt Total compensation coef of afock options = Pain may ket value gioption 1 x No. of options granted c$4 x 6000,000 shares = $42000,000 .: Total compensation cost for stock options = $ 40,000,000 34r (083 Journal entries 2018 Expense allocated each year = $42000,000 1. 2018 to 2020) 3 years = $14,000,000 Deterred tax asset = Compensation expense X Fax orate c. $ 14000,000 X 40% E = $5600,000

Page No @ On Aug 21,2022 cash greceived = No. of shares X exercise price = 6000,000 shares X $30 = $ 180,000,000 Paid in capital amount = $7 X 6000,000 shares = $42,000,000 Common stock amount = 6000,000 shares * $ipar common value = $6000,000 Paidin capital excess of par välue = 180,000,000 + 42000,000 - 6000,000 = $216,000,000 Income taxes payable = (manhef price --- exercise price) * Hoof Shanes & fax orate = ((34+1) -- 30 ) X 6000,000 X 400%. = (35-30 X 6000,000X 40% = '5X6000,000 X 40%. = $12,000,000

Page No ③ Deberred tax asset - Deberred tax amount for 1 year X I No. of years = 5600,000 x 3 years = $ 16,800,000 Paid in Capital tax efted- of stock options = 16800,000-12000,000 = $4800,000 Date Paorticular Debit | Credit dec 31, Compensation expense $14000,000 2018 Paid in capital - stock options $ 14000,000 Deferred tax asset dec 31 $ 5600,000 - Income tax expense $5600,000 Compensation expense $14000,000 2019 Paid in capital -elock options $14000,000 dec 31, Deberved tax asset : $ 5600,000 - 2019 | Income tax expense $5600,000 2018 dec.31, 1$ 14000,000 dec. 31, 2020 Compensation expense Paid in capital - stock Options $14000,000

Date dec 31, 2020 Page No 4 Debit Gordit $5600,000 $ 5600,000 $180,000,000 . . $42000,000 - $ 6000,000 $216,000,000 Particular 1. Deferred tax asset Income tax expense - Cash Paid in capital - stocks options Common sloch Paid in capital - excess of pay Aug 21, 2012 Augall 2022 Income taxes payable $12000,000 - paid in capital - tas elbed of stock 4 4600,000 Deberred tax asset - #16,800,000