Question

Assume that Alcaraz Co. has a stock-option plan for top management. Each stock option represents the right to purchase a share of Alcaraz P1 par value common stock in the future at a price equal to the fair value of the stock at the date of the grant. Alcaraz has 5,000 stock options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options P40 Market price at grant date (January 1, 2014) P40 Fair value of options at grant date (January 1, 2014) P6 Service period 5 yearsPage 16 of 16 Chapter 4 | Intermediate Accounting 3 Instructions 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 2014. c. Now assume that the market price of Alcaraz stock on the grant date was P45 per share. Repeat the requirements for (a) and (b). d. Alcaraz 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.