Question

On October 15, 2023, the board of directors of Martinez Materials Corporation approved a stock option plan for key executives. On January 1, 2024, 30 million stock options were granted, exercisable for 30 million shares of Martinez's $1 par common stock. - The options are exercisable between January 1, 2027, and December 31,2029 , at 80% of the quoted market price on January 1,2024 , which was $15. - The fair value of the 30 million options, estimated by an appropriate option pricing model, is $5 per option. - Martinez chooses the option to recognize forfeitures only when they occur. - Ten percent ( 3 million) of the options were forfeited when an executive resigned in 2025. - All other options were exercised on July 12, 2028 , when the stock's price jumped unexpectedly to $30 per share. Required: 1. When is Martinez's stock option measurement date? 2. Determine the compensation expense for the stock option plan in 2024. (Ignore taxes.) 3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Martinez's financial statements for 2025 and 2026. 5. Prepare the journal entry to account for the exercise of the options in 2028. 1. \& 2. When is Martinez's stock option measurement date? Determine the compensation expense for the stock option plan in 2024. (Ignore taxes.) Note: Enter your answer in millions (i.e., 10,000,000 should be entered as 10). Record compensation expense on December 31,2025. Note: Enter debits before credits. Record compensation expense on December 31,2026. Note: Enter debits before credits. Record the exercise of the options in 2028. Note: Enter debits before credits.

Answer 1

1. The stock option measurement date for Martinez is January 1, 2024. 2. The compensation expense for the stock option plan in 2024 is $150 million. 3. Forfeited stock options have a negative impact on the number of outstanding options but do not result in compensation expense. 4. The journal entry to account for the exercise of options in 2028 involves increasing common stock and additional paid-in capital while reducing stock options exercised.

Step-by-step explanation:

1. Martinez's stock option measurement date: The stock option measurement date is the date on which the fair value of the stock options is determined. In this case, it is January 1, 2024.

2. Compensation expense for the stock option plan in 2024: To determine the compensation expense, we need to multiply the fair value of each option ($5) by the number of options granted (30 million). The compensation expense for the stock option plan in 2024 is $150 million.

3. Effect of forfeiture of stock options: In 2025, 3 million options were forfeited due to an executive resignation. To reflect this on the financial statements, we need to reduce the number of outstanding options by 3 million. No compensation expense is recorded for forfeited options. In 2026, no options were forfeited, so the number of outstanding options remains the same.

4. Journal entry for exercise of options in 2028: When the options are exercised in 2028, the company needs to record an increase in common stock and additional paid-in capital. The journal entry to account for the exercise of the options would be:

Debit: Common Stock (30 million shares x $1 par value) $30 million

Debit: Additional Paid-in Capital (30 million shares x [$30 - $1]) $870 million

Credit: Stock Options Exercised $900 million