Question

5.(2 points) On January 1, 2018, Evans Company granted its employee, an option to buy 5,000 shares of Evans Co. stock for $25 per share, the option exercisable for 5 years from January 1, 2020. Using a fair value option pricing model, total compensation expense is determined to be $38,000. One employee resigned from Evans on 10/1/2019 which caused the termination of 1,000 shares of the options. The service period is for two years beginning January 1, 2018. How will Evans account for the termination of the 1,000 shares of options (Journal Entry)?

Answer 1

Total no. of exercisable options = 5,000 shares

Fair value = $ 25 per share

Grant date = 1/1/2018

Vesting period = 2 years

Total Compensation Expense for Vesting period, i.e., 2 years = $ 38,000

Therefore, Total Compensation expense for each year = $ 38,000 / 2 = $ 19,000.

Compensation expense $ 19,000 for Year 1 fully incurred since all 5,000 share options are exercisable.

1,000 shares out of total 5,000 shares terminated on 10/1/2019, i.e., in Year 2 before the end of vesting period

Therefore, total compensation expense to the co. for grant of stock options to be reduced proportionally. Since, 1000 shares terminated in Year 2, total compensation expense for Year 2 NOT to be expensed = ($ 38,000 / 2) * (1,000 / 5,000) = $ 3,800

At the end of year 1, $19,000 compensation expense to be expensed. It will be debited since it is an expense to the Company, with a corresponding credit to Additional Paid In Capital account - Stock Options (APIC), which is a part of total equity of the company.

When 1,000 shares are terminated, compensation expense to be reversed proportionally ( credited with $ 3,800 ) with a corresponding debit, i.e., reduction in APIC Stock Options A/c.

Journal entries

Date	Particulars	Debit amount ($)	Credit amount($)
31/12/2018	Stock Option Compensation Expense	$19,000
	APIC - Stock Options		$19,000
	(Being compensation expense for Year 1 of vesting period)
10/1/2019	Additional Paid in Capital (Stock Options)	$3,800
	Compensation Expense		$3,800
	(Being 1000 shares terminated in Year 2)