On October 15, 2017, the board of directors of Ensor Materials Corporation appro
ID: 2516478 • Letter: O
Question
On October 15, 2017, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2018, 20 million stock options were granted, exercisable for 20 million shares of s SI par common stock. The options are exercisable between January 1, 2021, and December 31, 2023, at 80% of the quoted market price on January 1, 2018, which was $15. The fair value of the 20 million options. estimated by an appropriate option pricing model, is $6 per option. Ensor chooses the option to recognize forfei- tures only when they occur. Ten percent (2 million) of the options were forfeited when an executive resigned in 2019. All other options were exercised on July 12, 2022, when the stock's price jumped unexpectedly to $19 per share. Required I. When is Ensor's stock option measurement date? 2. Determine the compensation expense for the stock option plan in 2018. (lgnore taxes.) 3. What is the effect of forfeiture of the stock options on Ensor's financial statements for 2019 and 2020? 4. Is this effect consistent with the general approach for accounting for changes in estimates? Explain 5. How should Ensor account for the exercise of the options in 2022?Explanation / Answer
1.) Measurement Date
The measurement date is date on which both
are known. And both are known on 1-Jan-2018 for the stock option plan, so, Measurement Date is 1-Jan-2018
2.)Compensation Expense
Options Expected to Vest = 20 Million Options
Compensation Cost = Fair Value * Options Expected to Vest = 6 * 20 Million = 120 Million USD
Vesting Period = 3 Years
Annual Compensation Expense = $40 Million for 2018,2019,2020
3.) Effect of Forfeiture of 2 Million Options
As 2 Million Options are forfieted in 2019,
The New Compensation Expense is $6 * 18 Million = $108 Million
Expense Already Recognised = $40 Million
Expense Un-Recognised = $68 Million
Vesting Period Remaining = 2 Years
Annual Compensation Expense = $34 Million for 2019 and 2020
4.) GAAP
Yes, according to generally accepted accounting principles, any changes in accounting estimates should be recorded with prospective effect and not retrospective effect.
And change in accounting principles shall be recognised with retrospective effect. Hence the treatment for the forfietures, is not a change in accounting policy, it is still to record forfietures as they occur, is recorded properly.
5.) Entry
Cash $216,000,000 [18 Million Share * 15 * 80%]
To Common Stock $ 18,000,000 [$1 Par Value]
To Paid in Capital in Excess of Par Value $198,000,000
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