Question

• Rutter Inc. granted 250,000 stock options to executives and employees on January 1, 2017. The options have a strike price is $10 per share and expire in 2019. The par value of the common stock is $1. Using an option pricing model, the company calculates a fair value of $20 per share. The expected service period, or benefit period, is 2 years.  

• Prepare the journal entries for 2017 and 2018.   

• In 2019, 40% of the options are exercised and the remaining options expire.      

Answer 1

 Options expected to vest = 250,000 x 40% = 1,00,000 

Stock option compensation cost = Options x Fair value of option at grant Stock option compensation cost = 100,000 x $20 = 20,00,000

Total stock option compensation = 20,00,000 Vesting period = 2 years Service period completed = 2 year Cumulative expense at end of year 1 = Total cost x Service period / Vesting period Cumulative expense at end of year 1 = 20,00,000 x 1/2 = Previously recognized expense = 0 Stock option compensation expense for year 1 = 10,00,000

Stock option expense journal entry – Year 1

Account Debit Credit

Stock option compensation expense 10,00,000

APIC – Stock options 10,00,000

Total 10,00,000 10,00,000

 Options expected to vest = 250,000 x 40% = 1,00,000 

Stock option compensation cost = Options x Fair value of option at grant Stock option compensation cost = 100,000 x $20 = 20,00,000

Total stock option compensation = 20,00,000 Vesting period = 2 years Service period completed = 2 year Cumulative expense at end of year 1 = Total cost x Service period / Vesting period Cumulative expense at end of year 1 = 20,00,000 x 2/2 = Previously recognized expense = 0 Stock option compensation expense for year 1 = 20,00,000

Stock option expense journal entry – Year 2

Account Debit Credit

Stock option compensation expense 20,00,000

APIC – Stock options 20,00,000

Total 20,00,000 20,00,000