Question

American Optical Corporation provides a variety of share-based compensation plans to its employees Under its executive stock option plan, the company granted options on January 1, 2018, that permit executives to acquire 4 million of the company's st par common shares within the next five years, but not before December 31, 2019 (the vesting date. The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes Required: 1. Determine the total compensation cost pertaining to the options. 2. to 4. Prepare the appropriate joumal entries. Complete this question by entering your answers in the tabs below. Reg1 Reg 2 to 4 Determine the total compensation cost pertaining to the options. (Enter your answer in millions (ie., 10,000,000 should be entered as 10).)

Answer 1

Answer:

1.)
Total compensation cost of stock options = Estimated fair market value of the option x Number of options granted
=$3 x 4,000,000 shares
=$12,000,000
Thus total compensation cost of stock options is $12,000,000

2. to 4.) Journal Entries

Date	Account title and explanation	Debit ($)	Credit ($)
	No entry required
31-Dec-2018	Compensation expense	$6,000,000
	Paid-in-capital-stock options		$6,000,000
	(To record compensation expense
31-Dec-2019	Compensation expense	$6,000,000
	Paid-in-capital-stock options		$6,000,000
	(To record compensation expense)

Working Notes:
Compensation expense = Total compensation cost of stock options/Vesting period
=$12,000,000/2 years
=$6,000,000