The Smith corps provides an executive stock option plan. Under the plan the comp
ID: 2482926 • Letter: T
Question
The Smith corps provides an executive stock option plan. Under the plan the company granted common shares of 70 million of the company’s 1$ par value common shares within the next eight years, but not before December 31, 2015. The exercise price is the market price of the shares on the date of the grant, $27 per share. The fair value of the options is estimated by an appropriate option pricing model, is $4 per option. .
Prepare the journal Entry to record compensation expense on December 31, 2012
Suppose during 2013 it is determined that 15% of the options had been forfeited. Based on this information, prepare the journal entry to record compensation expense on Dec 31, 2013
During 2014 another 5% of the options were forfeited, prepare the journal entry to record the compensation expense at Dec 31, 2014
Suppose on Jan 15, 2016 25% of the remaining options granted were exercised when the market price of the stock was 30$ per share. Prepare the journal entry to record the exercised options.
Explanation / Answer
Solution:
The total compensation is allocated to expense over the 4-year service (vesting) period: 2012 - 2015
$280 million ÷ 4 years = $70 million per year
December 31, 2012 ($ in millions)
Compensation expense ($280 million ÷ 4 years) 70
Paid-in capital – stock options 70
December 31, 2013 ($ in millions)
Compensation expense 59.5
Paid-in capital – stock options 59.5
($280 million x 0.85 x ¼)
December 31, 2014 ($ in millions)
Compensation expense 70
Paid-in capital – stock options 70
([$280 x 95% x ¾] – [$70 + 59.5])
December 31, 2015
Cash ($27 exercise price x 35 million shares) 945
Paid-in capital - stock options (1/2 account balance) 17.5
Common stock (35 million shares at $1 par per share) 35
Paid-in capital – excess of par (to balance) 927.5
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