On January 1, 2013, Lyndon Systems granted its top executives options to purchas

Question

On January 1, 2013, Lyndon Systems granted its top executives options to purchase 6,000 shares of common stock (par $2) at an exercise price of $20 per share, the market price on January 1. The options have an estimated fair value of $8 per option and may be exercised over a 4-year span, starting 3 years hence. Suppose all options are exercised 3 years hence, when the market value of the stock is $45 per share. 1. Prepare the journal entries Lyndon would record to account for compensation expense orn December 31, 2013, December 31, 2014, and December 31, 2015. 2. Prepare the appropriate journal entry for the exercise of the options on the books of Lyndon Systems 3. Discuss the economic benefits to managers and the benefits to the company from these options.

Explanation / Answer

Journal Entry Computation of Compensation Expense Date Account Tittle & Explanation Debit Credit 2013 Stock Option Compensation Expense $16,000 No. of Option Share 6000 APIC -Stock Option $16,000 Fair Value on 01 Jan 2013 $8 Total Fare Value of Option $48,000 2014 Stock Option Compensation Expense $16,000 Vesting Period 3 year APIC -Stock Option $16,000 Compensation Expense   For 2013 $16,000 ($48000/3*1) 2014 Stock Option Compensation Expense $16,000 Compensation Expense   for 2014 $16,000 APIC -Stock Option $16,000 Compensation Expense   for 2015 $16,000 2014 Cash (6000 share*$20) $120,000 APIC -Stock Option $48,000 Stock Option Compensation Expense $102,000 Common Stock (6000Share*$2) $12,000 Paid in Capital in Excess ($43*6000) $258,000 Manager get a net Benfit of ($258000-$120000) i.e. $138000 by exercising Option and Company's risk about manger will be left from the organisation will be mitigated

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