Question

On January 1, 2021, King's X Corp. granted stock options to officers and key employees for the purchase of 45,000 shares of the company's $10 par common stock at $27 per share. The options were exercisable within a 4-year period beginning January 1, 2026 by grantees still in the employ of the company, and had an expiration date of December 31, 2029. The vesting (service) period for this award was 5 years.

Assume that a valid option pricing model determined the fair value of each option at the grant date to be $18. The fair market value of King's X stock on the grant date was $30 per share.
On April 20, 2026, 32,000 options were exercised when the market price of the common stock was $42.50 per share. The remaining 13,000 options were never exercised.
Required:
Prepare any and all required journals entries related to the stock options for the following dates:
-January 1, 2021
-December 31, 2021
-December 31, 2022
-April 20, 2026
-December 31, 2029

Answer 1

Journal entries for stock options are made only when options vest, are exercised, or expire. Specific dates require recognizing compensation expense, adjusting paid-in capital, reflecting cash received from option exercise, and accounting for any expired options.

Step-by-step explanation:

Journal Entries for Stock Options

The provided details outline the stock options granted by King's X Corp. and their subsequent exercise and expiration. Below are the necessary journal entries for the given dates:

January 1, 2021: No journal entry is required on the grant date because the options have no intrinsic value (exercise price is less than market price).

December 31, 2021 - December 31, 2025 (each year end): The company records compensation expense related to the options that vest during the year.

Dr. Compensation Expense $(45,000 options * $18 fair value) / 5 years

Cr. Additional Paid-In Capital—Stock Options for corresponding amount each year.

April 20, 2026: When 32,000 options are exercised, the entry is:

Dr. Cash $(32,000 * $27)

Dr. Additional Paid-In Capital—Stock Options

Cr. Common Stock $(32,000 * $10)

Cr. Additional Paid-In Capital—Common Stock for the remaining amount

December 31, 2029: The remaining options expire. The entry is:

Dr. Additional Paid-In Capital—Stock Options

Cr. Additional Paid-In Capital—Expired Stock Options for the value of unexercised options.

Please note that specific amounts are not calculated because the question does not provide full details of the options plan, such as the number of options vested each year.