Question

Exercise 138

Prepare the necessary entries from 1/1/17-2/1/19 for the following events using the fair value method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

1.		On 1/1/17, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 15,000 shares of common stock at $35 per share. The par value is $10 per share.
2.		On 2/1/17, options were granted to each of five executives to purchase 15,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/19. It is assumed that the options were for services performed equally in 2017 and 2018. The Black-Scholes option pricing model determines total compensation expense to be $1,800,000.
3.		At 2/1/19, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.

No.	Date	Account Titles and Explanation	Debit	Credit
1.	1/1/17
2.	2/1/17
	12/31/17
	12/31/18
3.	2/1/19
		(To record exercise of options)
	2/1/19
		(To record lapse of options)

Answer 1

01-01-2017	No Entry necessary on 1/1/17
02-01-2017	No Entry necessary on 2/1/17
31-12-2017	Compensation Expenses	9,00,000
	Paid in Capital - Stock options		9,00,000
	To Record option expenses for 2017
31-12-2018	Compensation Expenses	9,00,000
	Paid in Capital - Stock options		9,00,000
	To Record Option expenses for 2018
02-01-2019	Cash(15000*35)*4	21,00,000
	Paid in Capital - Stock options (1800000*4/5)	14,40,000
	Common Stock		6,00,000
	Paid in Capital in excess of Par		29,40,000
	To record exercise of option
02-01-2019	Paid in Capital - Stock options	3,60,000
	Paid in Capital - Expired Stock options		3,60,000
	To record lapse of options