Question

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. Utta should recognize the expiration by debiting what?

Answer 1

Utta Corp should debit 'additional paid-in capital - stock options' for the value of the expired options, which is $6,000, representing 1,000 unexercised options at the estimated grant date value of $6 each.

Step-by-step explanation:

When Utta Corp's remaining stock options expire in 20X5, the company should recognize the expiration by debiting an equity account related to stock options, often referred to as 'additional paid-in capital - stock options' or 'paid-in capital - expired stock options'. Since the estimated value of the options on the grant date was $6 per option, and they granted 10,000 options, the total value of the grant was $60,000. Over the vesting period, this amount would typically be credited to increase the equity on the balance sheet. However, for the expired options, the appropriate journal entry upon expiration would be debiting 'additional paid-in capital - stock options' and crediting 'cash' or 'stock options outstanding', depending on the company's accounting practice. As 9,000 options were exercised, 1,000 options expired, hence the expired amount corresponds to $6,000 (1,000 options x $6 per option).