Question

Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2018, options were granted for 28 million $1 par common shares. The exercise price is the market price on the grant date-$8 per share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair value of the 28 million options, estimated by an appropriate option pricing model, is $1 per option Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2. to 5. Prepare the appropriate journal entries to record compensation expense on December 31, 2018 and 2019. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2020, when the market price is $9 per share and the entry on December 31, 2024, when the remaining options that have vested expire.

Answer 1

1) Total compensation Cost :-

= Estimated Fair Market Value of the option * No. of Option granted

= $1 * 28 million

= $28 million

2-5) Journal Entries :-

S.no.	Particulars	Debit ($ in millions)	Credit ($ in millions)
Dec 31, 2018	Compensation Expense ($28 million / 2 years)	14
	Paid in Capital (Stock option)		14
	(Being Record Compensation Expenses of 2018)
Dec 31, 2019	Compensation Expense ($28 million / 2 years)	14
	Paid in Capital (Stock option)		14
	(Being Record Compensation Expenses of 2019)
Mar 12, 2020	Cash (21 million Shares * $8)	168
	Paid in Capital (Stock option) (75% of $28 million)	21
	Common Stock (21 million Shares * $1)		21
	Paid in Capital (Excess of Par)		168
	(Being 75% of option Exercise at $9 per share)
Dec 31, 2024	Paid in Capital (Stock Option) ($28-$21 million)	7
	Paid in Capital (Stock option Expire)		7
	(Being Record Remaining Option are Expire)