Question

on january 1, 2024, evans company granted its employee, an option to buy 5,000 shares of evans co. stock for $25 per share, the option exercisable for 5 years from january 1, 2026. using a fair value option pricing model, total compensation expense is determined to be $38,000. one employee resigned from evans on 10/1/2025 which caused the termination of 1,000 shares of the options. the service period is for two years beginning january 1, 2024. how will evans account for the termination of the 1,000 shares of options? group of answer choices additional paid-in capital-stock options $3,800 compensation expenses $3,800 compensation expenses $1,900 additional paid-in capital-stock options $1,900 additional paid-in capital-stock options $1,900 compensation expenses $1,900 compensation expenses $3,800 additional paid-in capital-stock options $3,800

Answer 1

Evans Company will adjust the compensation expense for the unvested portion of the options and credit Additional Paid-In Capital for the vested portion due to the resignation of the employee, based on the service period completed.

Step-by-step explanation:

When Evans Company accounts for the termination of the 1,000 shares of options due to an employee's resignation, they will adjust the compensation expense and additional paid-in capital-stock options accordingly. Since the total compensation expense for the options was determined to be $38,000, and this expense is recognized over the service period of two years, we must first calculate the expense per share. The total number of shares granted was 5,000, so the expense per share is $7.60 ($38,000 / 5,000 shares).

With the termination of 1,000 options, the related compensation expense would be adjusted by 1,000 shares times the expense per share, which equals $7,600. However, because the employee resigned before the service period was completed, only the proportion of the expense that corresponds to the service period completed by the employee needs to be recognized.

Since the employee resigned on October 1, 2025, and the service period began on January 1, 2024, the employee completed approximately 21 months of service out of the 24 months service period, or 7/8 of the service term. Thus, only 7/8 of the $7,600, or $6,650, would have been expensed by the time of resignation.

Therefore, the accounting entry would reduce the compensation expense by the amount not yet recognized, which is 1/8 of the $7,600, and increase the additional paid-in capital-stock options by the same amount. Consequently, the journal entry would include a credit to additional paid-in capital-stock options for $950 (1/8 of $7,600), and a debit to compensation expenses for the remaining recognized amount of $6,650 (7/8 of $7,600).