On January 1, 2015, Titania Inc. granted stock options to officers and key emplo

Question

On January 1, 2015, Titania Inc. granted stock options to officers and key employees for the purchase of 33,700 shares of the company’s $13 par common stock at $23 per share. The options were exercisable within a 5-year period beginning January 1, 2017, by grantees still in the employ of the company, and expiring December 31, 2021. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $407,400.

On April 1, 2016, 3,370 options were terminated when the employees resigned from the company. The market price of the common stock was $37 per share on this date.

On March 31, 2017, 20,220 options were exercised when the market price of the common stock was $44 per share.

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2015, 2016, and 2017.

Explanation / Answer

Journal Entries

Date Particulars Debit($) Credit($) 2015 31st dec Employee compensation A/c Dr. $407400 To Employee stock options A/c $407400 (For option expense recognised) Profit and loss A/c Dr. 407400 To Employee compensation A/c Dr. 407400 (Being option expense transferred to P&L) 2016 31st dec. Option expense to be reversed = 407400/33700 x 3370 = 40740 Employee stock option A/c Dr. 40740 To Employee compensation Expense A/c 40740 (Being option expense cancelled) Employee compensation expense A/c Dr. 40740 To Profit an loss A/c 40740 2017 31.mar Bank A/c Dr (20220x23) 465060 To Employee stock options A/c 465060 (Being option excercised) 31.3 Employee stock option A/c Dr.(244440 + 465060) 709500 To common stock A/c Dr. (20220 x 13) 262860 To additional paid in capital 446640 (being shares allotted)

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