Question

SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2018. The options permit holders to acquire 20 million of the company’s $1 par common shares for $15 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares on the date of grant is $17 per share. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $4.2 per option. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2. & 3. Prepare the appropriate journal entries to record compensation expense on December 31, 2018, 2019, and 2020. Record the exercise of the options if all of the options are exercised on May 11, 2022, when the market price is $18 per share.

Answer 1

1. Total compensation cost = 20 million* 4.2 = 84 million

2.

Date	General Journal	Debit (in millions)	Credit (in millions)
December 31,2018	Compensation expense	28
	Paid in Capital Stock Options		28
	[$84million /3years]
December 31,2019	Compensation expense	28
	Paid in Capital Stock Options		28
	[$84million /3years]
December 31,2020	Compensation expense	28
	Paid in Capital Stock Options		28
	[$84million /3years]

3.

Date	General Journal	Debit	Credit
May 11,2022	Cash [$15* 20million]	300
	Paid in Capital Stock options	84
	Common Stock [ $1*20million]		20
	Paid in Capital in excess of par		364
	[Exercise of options]