Question

P16.4 (LO 3) (Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock in the future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2020. The following data relate to the option grant. Exercise price for options $40 Market price at grant date (January 1, 2020) Fair value of options at grant date (January 1, 2020) $6 Service period 5 years Instructions $40 a. Prepare the journal entry(ies) for the first year of the stock-option plan. b. Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2020. c. Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b). d. Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense? 1. Substantially all employees may participate. 2. The discount from market is small (less than 5%). 3. The plan offers no substantive option feature. 4. There is no preferred stock outstanding.

Answer 1

a)

1/1/2020 No entry

12/31/2020    Dr. Compensation Expense ($6 X 5,000 ÷ 5)          6,000

                                  Cr.Paid-in Capital—Stock Options                          6,000

b)

1/1/2020    Dr. Unearned Compensation ($40 X 700)            28,000

                                                Cr. Common Stock ($1 X 700)                     700

                                                 Cr. Paid-in Capital in Excess of Par           27,300

12/31/2020     Dr. Compensation Expense ($28,000 ÷ 5)         5,600

                                         Cr.     Unearned Compensation                      5,600

c)

No change for part (a), unless the fair value of the options change

For part (b)

1/10/2020      Dr.Unearned Compensation ($45 X 700)       31,500

                                         Cr.      Common Stock ($1 X 700)                  700

                                         Cr.      Paid in Capital in Excess of Par                30,800

12/31/2020        Dr.   Compensation Expense ($31,500 ÷ 5)     6,300

                                        Cr.    Unearned Compensation                        6,300

d)

Numbers (1) substantially all employees may participate; (2) The discount from market is small (less than 5%); and (3) The plan offers no substantive option feature, are the three criteria that must be met for an employee stock-purchase plan to be non-compensatory. The fourth provision—there is no preferred stock outstanding—is irrelevant