Question

Under its executive stock option plan, National Corporation granted 15 million options on January 1, 2021, that permit executives to purchase 15 million of the company’s $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $32 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose that the options are exercised on April 3, 2024, when the market price is $36 per share. Ignoring taxes, what journal entry will National record?

Answer 1

Answer and Explanation :

As per the data given in the question,

Before passing the journal entries we need to do the following calculations which are shown below

Total compensation expense = Options granted × Fair value per option

= 15 million × $4 per options

= $60 million

Compensation expense to be recognized each year = $60 million ÷ 3 years

= $20 million

Now

Journal Entries are as follows

On Dec-31,2021

Compensation expense A/c Dr. $20 million

To Paid in capital stock options Cr. $20 million

(Being the compensation expense is recorded )

On Dec-31,2022

Compensation expense A/c Dr. $20 million

To Paid in capital stock options Cr. $20 million

(Being the compensation expense is recorded )

On Apr-3,2024

Cash A/c Dr. $480 million (15 million × $32)

Paid in capital stock options A/c Dr. $60 million

To Common stock Cr. $15 million

To Paid in capital in excess of par Cr. $525 million

(Being the exercise of options is recorded)