Question

Maritime Corp. is a junior mining company listed on the TSX. The common share price of Maritime fluctuates in value. Recent swings went from a high of $17 to a low of $0.50. Maritime issued stock options on 1 September 20X5 to a consultant, in exchange for a project completed over the last year. The consultant estimated her time was worth $48,000, but the company estimated that it could have had the necessary work done for about $40,000 cash. The options specified that 7,000 common shares could be bought for $0.40 per share at any time over the next 10 years. The market price of common shares was $2.50 on the day the options were issued. At the same time options were issued to the consultant, identical options were issued to the company lawyer for work done to date. An option pricing model valued each set of stock options at $44,000. Required:

1. Provide journal entries to record issuance of the two sets of options.

a. Record the entry for granting stock rights towards Consulting expense.

b. Record the entry for granting stock rights towards legal expense.

2. Assume that two years after issuance, when the market price of the shares was $15, the consultant exercised her options. Provide the appropriate entry to Record the entry for exercising the stock rights.

3. Assume that 10 years after issuance, when the market price of the shares was $0.10, the lawyer’s options expired. Provide the entry, if any to Record the entry for the expiration of stock rights.

Answer 1

Part 1

No.	Account titles and explanation	Debit	Credit
a	Consulting expense	44000
	Contributed capital: stock options outstanding		44000
b	Legal expense	44000
	Contributed capital: stock options outstanding		44000

Part 2

No.	Account titles and explanation	Debit	Credit
1	Cash (7000*0.40)	2800
	Contributed capital: stock options outstanding	44000
	Common shares		46800

Part 3

No.	Account titles and explanation	Debit	Credit
1	Contributed capital: stock options outstanding	44000
	Contributed capital: stock options expired		44000