Question

Heidi Software Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2024, that permit executives to acquire 5 million of the company’s $1 par common shares within the next five years, but not before December 31, 2025 (the vesting date).

The exercise price is the market price of the shares on the date of grant, $73.00 per share.
The fair value of the 5 million options, estimated by an appropriate option pricing model, is $18 per option.
No forfeitures are anticipated.
Ignore taxes.

Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2024.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2024.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2025.

Determine the total compensation cost pertaining to the options.
Note: Enter your answer in millions (i.e., 10,000,000 should be entered as 10).

Total compensation cost million

DateGeneral Journal
January 01, 2024
December 31 2024
December 31 2025

Answer 1

The total compensation cost pertaining to the options is $90,000,000. The journal entries to record the award of options and compensation expense are provided.

Step-by-step explanation:

To determine the total compensation cost pertaining to the options, we multiply the number of options granted by the fair value per option. In this case, 5 million options were granted with a fair value of $18 per option, so the total compensation cost is 5,000,000 * $18 = $90,000,000.

To record the award of options on January 1, 2024, we make the following journal entry:

January 01, 2024:

• Dr. Compensation expense $90,000,000
• Cr. Additional paid-in capital - stock options $90,000,000

To record compensation expense on December 31, 2024, we make the following journal entry:

December 31, 2024:

• Dr. Compensation expense $18,000,000
• Cr. Additional paid-in capital - stock options $18,000,000

To record compensation expense on December 31, 2025, we make the following journal entry:

December 31, 2025:

• Dr. Compensation expense $18,000,000
• Cr. Additional paid-in capital - stock options $18,000,000