Under its executive stock option plan, National Corporation granted options on J
ID: 2447618 • Letter: U
Question
Under its executive stock option plan, National Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company’s $1 par common shares within the next six years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $19 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option. Suppose that the options are exercised on April 3, 2016, when the market price is $25 per share.
Ignoring taxes, what journal entry will National record on April 3, 2016?
Under its executive stock option plan, National Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company’s $1 par common shares within the next six years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $19 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option. Suppose that the options are exercised on April 3, 2016, when the market price is $25 per share.
Explanation / Answer
Answer : Option Granted = 15,000,000
Vesting period = 6 years
Fair Value of option = $ 3
Total employee compensation expenses = 15,000,000*3 = 45,000,000
The Journal Entry pass every year as follows till the option exercise or expires
For Year 2013
Employee Compensation Expense A/C 45,000,000
To Employee Stock Options Outstanding A/C 45,000,000
For Year 2014
Employee Compensation Expense A/C 45,000,000
To Employee Stock Options Outstanding A/C 45,000,000
For Year 2015
Employee Compensation Expense A/C 45,000,000
To Employee Stock Options Outstanding A/C 45,000,000
Entry should be made on April 3,2016
For Year 2016
1) Employee Compensation Expense A/C 11,250,000
To Employee Stock Options Outstanding A/C 11,250,000
(In 2016 option exercised on April 3, 2016 so we considee the
entry nof first quarter)
On exercising of option
2) Bank a/c 285000000
Employee Stock Options Outstanding A/C 101250000
To Equity Share Capital A/c. 15,000,000
To Share Premium a/c. 371,250,000
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