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, 2021, that permit executives to acquire 4 million of the companyâs $1 par common shares within the next five years, but not before December 31, 2022 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Determine the total compensation cost pertaining to the options. 2. to 4. Prepare the appropriate journal entries.

Answer 1

1.$12,000,000

2.31-Dec-2021

Dr Compensation expense $6,000,000

Cr Paid-in-capital-stock options $6,000,000

31-Dec-2022

Dr Compensation expense $6,000,000

Cr Paid-in-capital-stock options $6,000,000

Step-by-step explanation:

1.)

Total compensation cost of stock options = Estimated fair market value of the option x Number of options granted

=$3 x 4,000,000 shares

=$12,000,000

Therefore total compensation cost of stock options is $12,000,000

2. to 4.) Journal Entries

31-Dec-2021

Dr Compensation expense $6,000,000

Cr Paid-in-capital-stock options $6,000,000

31-Dec-2022

Dr Compensation expense $6,000,000

Cr Paid-in-capital-stock options $6,000,000

Compensation expense

= Total compensation cost of stock options/Vesting period

=$12,000,000/2 years

=$6,000,000