Question

On January 1, 2016, EZ Inc. granted stock options to officers and key employees for the purchase of 250,000 shares of the company’s $1 par common stock at $86 per share. The options were exercisable within a 5-year period beginning January 1, 2018, by grantees still in the employ of the company, and expiring December 31, 2020. The service period for this award is 2 years. Assume that the fair value option pricing model determines total compensation expense to be $1,250,000.

On July 1, 2016, 20,000 option shares were terminated when the employees resigned from the company. The market value of the common stock was $88 per share on this date.

On March 31, 2018, 130,000 option shares were exercised when the market value of the common stock was $91 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2016, 2017, and 2018.

Answer 1

Requirement:- Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2016, 2017, and 2018.

Solution:-

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2016	No entry as this is the date of grant of stock options
Dec. 31, 2016	Compensation Expense (1,250,000/2)	$625,000
	Paid in Capital Stock options		$625,000
July 1, 2017	Paid in Capital Stock options	$50,000
	Compensation Expense		$50,000
	(625,000 * 20,000 /250,000)
Dec. 31, 2017	Compensation Expense (625,000 - 50,000)	$575,000
	Paid in Capital Stock options		$575,000
Mar. 31, 2018	Cash (130,000 * $86)	11,180,000
	Paid in Capital Stock options (1,250,000 * 130,000 / 250,000	650,000
	Common stock (130,000 * $1)		$130,000
	Paid in Capital in Excess of par- Common Stock		$11,700,000

Thank you!!!