Question

Problem 16-4 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 4,200 stack options outstanding, which were granted at the beginning of 2017, The following data relate to Now assume that the market price of Amazon stock on the grant date was $45 per share Prepare the journal entries for the first year of the plan assuming that, rather than options, 780 shares of restricted stack were granted at the beginning of 2017. (Credit account titles are automatically indented when 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.) Date Account Titles and Explanation Debit Credit Exerdse price for options Market price at grant date nuary 1, 2017) Fair value of options at grant date (anary 1, 2017) Service period $40 $40 56 5 years Prepare the joumal entries for the first year of the stock-option plan. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Date Account Titles and Explanation Debit Credit 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? Provislons (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. Click if you would like to Show Work for this question:Onen Show Wark Prepare the journal entries for the first year of the plan assumine that, rather than options, 780 shares of restricted stock were granted at the beginning of 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit

Answer 1

Solution:

a.

1/1/2017 No entry

12/31/2017 Compensation Expense ($6 X 4,200 ÷ 5) 5,040

Paid-in Capital—Stock Options 5,040

b.

1/1/2017 Unearned Compensation ($40 X 780) 31,200

Common Stock ($1 X 780) 780

Paid-in Capital in Excess of Par 30,420

12/31/2017 Compensation Expense ($31,200 ÷ 5) 6,240

Unearned Compensation 6,240

c. No change for part a, unless the fair value of options change.

Part b

1/1/2017 Unearned Compensation ($40 X 780) 31,200

Common Stock ($1 X 780) 780

Paid-in Capital in Excess of Par 30,420

12/31/2017 Compensation Expense ($31,200 ÷ 5) 6,240

Unearned Compensation 6,240

d. 1) Substantially all employees may participate;

2) Discount from market is small (less than 5%) and

3) Plan offers no substantive option feature are three criteria that should be met for an employee stock purchase plan to be non-compensatory.

4) No preferred stock outstanding - is irrelevant.