Walters Audio Visual, Inc., offers a stock option plan to its regional managers.
ID: 2571907 • Letter: W
Question
Walters Audio Visual, Inc., offers a stock option plan to its regional managers. On January 1, 2016, options were granted for 40 million $1 par common shares. The exercise price is the market price on the grant date, $9 per share. Options cannot be exercised prior to January 1, 2018, and expire December 31, 2022. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option. Because the plan does not qualify as an incentive plan, Walters will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The income tax rate is 40%.
2.
Prepare the necessary journal entries.
-Record compensation expense on December 31, 2016.
-Record any tax effect related to compensation expense recorded in 2016.
-Record compensation expense on December 31, 2017.
-Record any tax effect related to compensation expense recorded in 2017.
-Record the exercise of the options on March 20, 2021 when the market price is $13 per share.
-Record any tax effect related to the exercise of the options.
3.
Assume the option plan qualifies as an incentive plan if all of the options are exercised on March 20, 2021, when the market price is $12 per share. Prepare the necessary journal entries
-Dec 31, 2016 Record compensation expense on December 31, 2016.
-Dec 31 ,2016 Record any tax effect related to compensation expense recorded in 2016.
- Dec 31, 2021 Record the exercise of the options on March 20, 2021 when the market price is $12 per share.
-March 31, 2021 Record any tax effect related to the exercise of the options.
:Correct my part 3!
Debit Credit General Journal No Date 40 December 31, 2016 Compensation expense 40 Paid-in capital-stock options 16 December 31, 2016 2 Deferred tax asset Income tax expense 40 December 31, 2021 Compensation expense 40 Paid-in capital-stock options 16 March 31 2021 4 Deferred tax asset 16 Income tax expenseExplanation / Answer
2. Journal entries:
Date
Account title
Debit
Credit
December 31, 2016
Compensation expenses
Paid-in capital- Stock options
(40 million / 2 years (Jan 2016 to Jan 2018, cost to be recognized over 2 years)
20
20
December 31, 2016
Differed tax asset
Income tax expenses
(20million * 40%)
8
8
December 31, 2017
Compensation expenses
Paid-in capital- Stock options
(40 million / 2 years (Jan 2016 to Jan 2018, cost to be recognized over 2 years)
20
20
December 31, 2017
Deferred tax asset
Income tax expenses
(20million * 40%)
8
8
December 31, 2021
Cash (40million * $9)
Paid-in capital- Stock options
Common stock
Paid-in capital- Excess of par
360
40
40
360
December 31, 2021
Income tax and employment tax payable
Deferred tax asset
Paid-in capital- Tax effect of Stock options
32
16
16
3. Journal entries:
Date
Account title
Debit
Credit
December 31, 2016
Compensation expenses
Paid-in capital- Stock options
(40 million / 2 years (Jan 2016 to Jan 2018, cost to be recognized over 2 years)
20
20
December 31, 2016
No journal entry required
(Incentive plan does not provide a tax deduction for employer)
December 31, 2021
Cash (40million * $9)
Paid-in capital- Stock options
Common stock
Paid-in capital- Excess of par
360
40
40
360
December 31, 2021
No journal entry required
(Incentive plan does not provide a tax deduction for employer)
Date
Account title
Debit
Credit
December 31, 2016
Compensation expenses
Paid-in capital- Stock options
(40 million / 2 years (Jan 2016 to Jan 2018, cost to be recognized over 2 years)
20
20
December 31, 2016
Differed tax asset
Income tax expenses
(20million * 40%)
8
8
December 31, 2017
Compensation expenses
Paid-in capital- Stock options
(40 million / 2 years (Jan 2016 to Jan 2018, cost to be recognized over 2 years)
20
20
December 31, 2017
Deferred tax asset
Income tax expenses
(20million * 40%)
8
8
December 31, 2021
Cash (40million * $9)
Paid-in capital- Stock options
Common stock
Paid-in capital- Excess of par
360
40
40
360
December 31, 2021
Income tax and employment tax payable
Deferred tax asset
Paid-in capital- Tax effect of Stock options
32
16
16
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.