On October 15, 2012, the board of directors of Ensor Materials Corporation appro

Question

On October 15, 2012, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2013, 21 million stock options were granted, exercisable for 21 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2016, and December 31, 2018, at 90% of the quoted market price on January 1, 2013, which was $10. The fair value of the 21 million options, estimated by an appropriate option pricing model, is $4 per option. 2.1 million options were forfeited when an executive resigned in 2014. All other options were exercised on July 12, 2017, when the stock's price jumped unexpectedly to $20 per share.

a) When is Ensor’s stock option measurement date?

b) Determine the compensation expense for the stock option plan in 2013. (Ignore taxes.)

c) What is the effect of forfeiture of the stock options on Ensor's financial statements for 2014 and 2015?

d) How should Ensor account for the exercise of the options in 2017? Recored it as a journal entry

On October 15, 2012, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2013, 21 million stock options were granted, exercisable for 21 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2016, and December 31, 2018, at 90% of the quoted market price on January 1, 2013, which was $10. The fair value of the 21 million options, estimated by an appropriate option pricing model, is $4 per option. 2.1 million options were forfeited when an executive resigned in 2014. All other options were exercised on July 12, 2017, when the stock's price jumped unexpectedly to $20 per share.

a) When is Ensor’s stock option measurement date?

b) Determine the compensation expense for the stock option plan in 2013. (Ignore taxes.)

c) What is the effect of forfeiture of the stock options on Ensor's financial statements for 2014 and 2015?

d) How should Ensor account for the exercise of the options in 2017? Recored it as a journal entry

Explanation / Answer

a) When is Ensor’s stock option measurement date?

Ans)January 1, 2013

..

b) Determine the compensation expense for the stock option plan in 2013

Ans) The compensation expense for the stock option plan in 2013 = 21m*4/3

= $28 million

..

..

c) What is the effect of forfeiture of the stock options on Ensor's financial statements for 2014 and 2015?

Ans)Employee Compenstaion expense will decrease in 2014 and 2015 as compared to Employee Compensation Expense in 2013

.

Employee Compensation Expense in 2014 = (21m-2.1m)*4 *(2/3) - 28m

= 50.4m - 28m

= $22.4 million

Employee Compensation Expense in 2014 = (21m-2.1m)*4 - 28m - 22.4m

= $25.2 million

..

..

d) How should Ensor account for the exercise of the options in 2017? Recored it as a journal entry

Ans)Journal Entry:-

Debit Bank [(10*90%)*18.9m] = 170.10m

Debit Employee Compensation Expesne = 75.60,m

Credit Common STock (18.9m*1) = 18.90m

Credit Paid in Capital in Excess of Par Value = 226.80

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