Question

Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2021, options were granted for 72 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, 2023, and expire December 31, 2027. The fair value of the 72 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, 2021 and 2022. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2023, when the market price is $9 per share and the entry on December 31, 2027, when the remaining options that have vested expire without being exercised. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 to 5 Determine the total compensation cost pertaining to the incentive stock option plan. (Enter 10,000,000 should be entered as 10).) Total compensation cost million < Req1 Req 2 to 5 >

Answer 1

Fair value of the option = Market price - Excercise price = $8- $1 = $7

Vesting period ( January 2021 to December 2022)= 2 years

Employee compensation expense is to be recognised over the period of vesting

Total employee compensation expense =72,000,000* $7= $504,000,000.

	Year	2021	2022
(a)	Employee compensation expense( Total)	504000000
	Vesting period	2 years	2 years
(c)	Expected year of vesting	End of 2nd year	End of 2nd year
(b)	Year of vesting	1	2
	Expense to be recognised	1/2	2/2
	Employee compensation expense to be recognised till now( a*c/b)	252000000	504000000
	Already recognised in the books	0	252000000
	To be recognised in current year	252000000	252000000

Date	Account	Debit	Credit
31-Dec-21	Employee Compensation expense A/c	252000000
	To ESOP liabilty A/c		252000000
	(being employee compensation expense for the year recognised)
	Profit/Loss A/c	252000000
	To Employee Compensation expense A/c		252000000
	Being employee Compensation expensed charged to P&L
31-Dec-22	Employee Compensation expense A/c
	To ESOP liabilty A/c
	(being employee compensation expense for the year recognised)
	Profit/Loss A/c
	To Employee Compensation expense A/c
	Being employee Compensation expensed charged to P&L
12-Mar-23	Bank A/c	54000000
	ESOP Liabilty A/c	378000000
	General reserve A/c ( Balancing Figure)	54000000
	To Equity Capital		54000000
	To Premium on issue of Equity/Securities premium		432000000
	Being options excercised by 75% of the option holders

The shortfall of the provision created (ESOP liabilty) for employee compensation is to be charged out of the reserves.Alternative to assuming the reserve amount as balancing figure we can compute it as under

Reserve = $1 (excess liabilty i.e,. $9-$8)*72million*75%= $54000000.