Question

Martinez Audio Visual Incorporated Offers An Incentive Stock Option Plan To Its Regional Managers. On January 1, 2024, Options Were Granted For 80 Million $1 Par Common Shares. The Exercise Price Is The Market Price On The Grant Date—$7 Per Share. Options Cannot Be Exercised Prior To January 1, 2026, And Expire December 31, 2030. The Fair Value Of The 80

Martinez Audio Visual Incorporated offers an incentive stock option plan to its regional managers. On January 1, 2024, options were granted for 80 million $1 par common shares.

The exercise price is the market price on the grant date—$7 per share.
Options cannot be exercised prior to January 1, 2026, and expire December 31, 2030.
The fair value of the 80 million options, estimated by an appropriate option pricing model, is $1 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Record compensation expense on December 31, 2024.
3. Record compensation expense on December 31, 2025.
4. Record the exercise of 75% of the options on March 12, 2026, when the market price is $8 per share.
5. Record the expiration of options

Answer 1

To determine the total compensation cost pertaining to the incentive stock option plan, multiply the number of options granted by the fair value of the options. To record compensation expense on December 31, 2024, multiply the number of options granted by the fair value of the options and divide by the vesting period. The same calculation can be used to record compensation expense on December 31, 2025.

Step-by-step explanation:

The total compensation cost pertaining to the incentive stock option plan can be calculated by multiplying the number of options granted (80 million) by the fair value of the options ($1 per option).

Compensation expense on December 31, 2024, can be recorded by multiplying the number of options granted (80 million) by the fair value of the options ($1 per option) and dividing it by the vesting period.

Compensation expense on December 31, 2025, can be recorded using the same calculation as in 2.

When 75% of the options are exercised on March 12, 2026, the compensation expense will be recorded by multiplying the number of options exercised (75% of 80 million) by the difference between the market price of the stock on the exercise date ($8) and the exercise price ($7).

The expiration of options does not require any recording of compensation expense.