Question

Assume that Amazon.com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock in the future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2014.

The following data relate to the option grant.
Exercise price for options = $40
Market price at grant date (January 1, 2014) = $40
Fair value of options at grant date (January 1, 2014) = $6
Service period = 5 years.
Instructions:
(a) Prepare the journal entry(ies) for the first year of the stock-option plan.
(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2014.
(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b).
(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense?
(1) Substantially all employees may participate.
(2) The discount from market is small (less than 5%).
(3) The plan offers no substantive option feature.
(4) There is no preferred stock outstanding.

Answer 1

a.

1/1/2014 No entry

12/31/2014

Dr Compensation Expense $6,000

Cr Paid-in Capital—Stock Options $6,000

b. 1/1/2014

Dr Unearned Compensation $28,000

Cr Common Stock $700

Cr Paid-in Capital in Excess of Par $27,300

12/31/2014

Dr Compensation Expense $5,600

Cr Unearned Compensation $5,600

c. No change for Part A

Part B

1/1/2014

Dr Unearned Compensation $31,500

Cr Common Stock $700

Cr Paid-in Capital in Excess of Par $30,800

12/31/2014

Dr Compensation Expense $6,300

Cr Unearned Compensation $6,300

d. 0ptions 1,2&3

1.Substantially all the employees may participate

2. Discount from the market is small (less than 5%)

3. The plan tend to offers no substantive option feature.

Step-by-step explanation:

a.Preparation of the journal entry(ies) for the first year of the stock-option plan.

1/1/2014 No entry

12/31/2014

Dr Compensation Expense $6,000

($6 * 5,000 ÷ 5)

Cr Paid-in Capital—Stock Options $6,000

b. Preparation of the journal entry(ies) for the first year of the plan

1/1/2014

Dr Unearned Compensation $28,000

($40 * $700)

Cr Common Stock $700

($1 * 700)

Cr Paid-in Capital in Excess of Par $27,300

($28,000-$700)

12/31/2014

Dr Compensation Expense $5,600

($28,000 ÷ 5)

Cr Unearned Compensation $5,600

c.

a. In a situation where we assume that the market price of the stock on the grant date was $45 per share their would be NO change for PART A except in a situation where the fair value of options changes.

Part B

1/1/2014

Dr Unearned Compensation $31,500

($45 * $700)

Cr Common Stock $700

($1 *$700)

Cr Paid-in Capital in Excess of Par $30,800

($31,500-$700)

12/31/2014

Dr Compensation Expense $6,300

($31,500 ÷ 5)

Cr Unearned Compensation $6,300

d. Based on the information given the provisions that must be in place for the plan in order to avoid recording compensation expense will be option 1,2&3

1.Substantially all the employees may participate

2. Discount from the market is small (less than 5%)

3. The plan tend to offers no substantive option feature.