Question

Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2018, options were granted for 12 million $1 par common shares. The exercise price is the market price on the grant date—$7 per share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair value of the 12 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 $8 per share and the entry on December 31, 2024, when the remaining options that have vested expire.

Answer 1

1. Total compensation cost = Options granted * Fair Value of Option

Total compensation cost = 12 Million * $1

Total compensation cost = $ 12 Million

2. Journal Entries

Debit $ 6,000,000.00 Date General Journal Dec 31 2018 Compensation Expense (Total Cost/2 Years) Paid in Capital - Stock Options 6,000,000.00 Dec 31 2019 Compensation Expense 6,000,000.00 Paid in Capital - Stock Options S 6,000,000.00 Mar 12 2020 | Cash ($7 * 12000000 * 75%) $63,000,000.00 Paid in Capital-Stock Options (S12 Million * 75%) | $ 9,000,000.00 Common Stock (12 Million * 75%) Paid in Capital - Excess of Par S 9,000,000.00 $ 63,000,000.00 Dec 31 2024 Paid in Capital - Stock Options $ 3,000,000.00 Paid in Capital - Expiration of Stock Options 3,000,000.00