Question

LCI Cable Company grants 3.0 million performance stock options to key executives at January 1, 2021. The options entitle executives to receive 3.0 million of LCI $1 par common shares, subject to the achievement of specific financial goals over the next four years. Attainment of these goals is considered probable initially and throughout the service period. The options have a current fair value of $8 per option. Required: 1. Prepare the appropriate entry when the options are awarded on January 1, 2021, 2. Prepare the appropriate entries on December 31 of each year 2021-2024 3. Suppose at the beginning of 2023, LCI decided it is not probable that the performance objectives will be met. Prepare the appropriate entries on December 31 of 2023 and 2024

Answer 1

Preparation of Journal Entries: Date General Journal 1 No entry required Debit ($) Credit ($) $ 60,00,000 2 31-Dec-21 Compensation Expense Paid-in-capital-Stock options (To record compensation expense) $ 60,00,000 $ 60,00,000 31-Dec-22 Compensation Expense Paid-in-capital-Stock options (To record compensation expense) $ 60,00,000 $ 60,00,000 31-Dec-23 Compensation Expense Paid-in-capital-Stock options (To record compensation expense) $ 60,00,000 $ 60,00,000 31-Dec-24 Compensation Expense Paid-in-capital-Stock Options (To record compensation expense) $ 60,00,000 3 Estimated compensation cost of options = (Fair market value per share x Number of options expected to vest) =$8 x 0 shares Credit ($) Debit ($) $ 1,20,00,000 Date General Journal 31-Dec-23 Paid-in-capital-Stock options Compensation Expense (To record compensation expense) $ 1,20,00,000 31-Dec-24 No Entry Required Working Notes: Compensation cost of stock options = Estimated fair market value of the option x Number of options granted =$8 x 3,000,000 shares = $24,000,000 Allocation each year = Total compensation cost of stock options/Vesting period = $24,000,000/4 years = $6,000,000 * Kindly Comment down for any clarifications/ queries and please upvote.