At January 1, Year 1, AMC Company grants 10,000 options that permit key executiv

Question

At January 1, Year 1, AMC Company grants 10,000 options that permit key executives to acquire 10,000 of the company’s $1 par common shares within the next five years, but not before December 31, Year 3 (the vesting date). The exercise price is the market price of the shares on the date of grant, $20 per share. The fair value of the options is $4 per option. Eighty percent of the options (or 8,000) are exercised on January 5, Year 4 when the market price is $30 per share. The remaining 20% of the options expire as unexercised when the market price is $18 per share. Prepare the appropriate journal entry for the expiration of the unexercised options.

Record the options that expire as unexercised at its fair value

Explanation / Answer

Ans:

This is a question of Share based payment- Employee Stock Options

a. N.of option to employees= 10,000 option

b. Exercise price(EP) on grant date= $20 per share

c. Fair value(FV) of option at grant date= $4 per option

d. Vesting date= 31st Dec, 3 Year thus Vesting period= 3 Years

e. Par value per share= $1

Option Expense

Option expense to be recognised= {(Fair Value of option on grant date*No. of options expected to vest*period expired) / Total Vesting period} - (option expense recognised in previous years)

Option expense at Year end 1= (4*10,000*1)/3 - 0 = $13,333

Option expense at Year end 2= (4*10,000*2)/3 - 13,333 = $13,333

Option expense at Year end 3= (4*10,000*3)/3 - 26,666 = $13,334

Journal Entries:

Employee Compensation --- Dr.

To Employee Stock Option

Profit and loss -----------------Dr.

To Employee Compensation

Employee Compensation --- Dr.

To Employee Stock Option

Profit and loss -----------------Dr.

To Employee Compensation

Employee Compensation --- Dr.

To Employee Stock Option

Profit and loss -----------------Dr.

To Employee Compensation

Bank ----------------------------Dr.

To Employee Stock option

(8,000 options*20 exercise price)

Employee Stock Option------Dr.

To Equity Share Capital

(8,000 shares *1 par value)

Employee Stock Option-----Dr.

To Security Premium

(8,000 shares*(20 EP+4 FV- 1par)

Employee Stock option------Dr.

To General Reserve

(2,000 options lapsed*4 per option FV)

Date Particular Debit Amount Credit Amount Jan 1, Year 1 No entry as on grant date Dec 31, Year 1

Employee Compensation --- Dr.

To Employee Stock Option

13,333 13,333 Dec 31, Year 1

Profit and loss -----------------Dr.

To Employee Compensation

13,333 13,333 Dec 31, Year 2

Employee Compensation --- Dr.

To Employee Stock Option

13,333 13,333 Dec 31, Year 2

Profit and loss -----------------Dr.

To Employee Compensation

13,333 13,333 Dec 31, Year 3

Employee Compensation --- Dr.

To Employee Stock Option

13,334 13,334 Dec 31, Year 3

Profit and loss -----------------Dr.

To Employee Compensation

13,334 13,334 Jan 5, Year 4

Bank ----------------------------Dr.

To Employee Stock option

(8,000 options*20 exercise price)

160,000 160,000 Jan 5, Year 4

Employee Stock Option------Dr.

To Equity Share Capital

(8,000 shares *1 par value)

8,000 8,000 Jan 5, Year 4

Employee Stock Option-----Dr.

To Security Premium

(8,000 shares*(20 EP+4 FV- 1par)

184,000 184,000 Dec 31, Year 5

Employee Stock option------Dr.

To General Reserve

(2,000 options lapsed*4 per option FV)

8,000 8,000

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