Question

American Optical 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, 2018, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not before December 31, 2019 (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. Required: 1. Determine the total compensation cost pertaining to the options. 2. to 4. Prepare the appropriate journal entries.

Answer 1

Answer and Explanation:

The computation and the journal entries are shown below:

1. Total compensation cost is

= Estimated fair value of the options × number of options granted

= $3 × 4,000,000

= $12,000,000

Now the journal entries are shown below:

2. No journal entry is required in case of award of options

3. Compensation expense $6,000,000

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

(Being the compensation expense is recorded)

For recording this we debited the expense as it increased the expenses and at the same time it also increased the stockholder equity

The computation is shown below:

= $12,000,000 ÷ 2 years

= $6,000,000

4. Compensation expense $6,000,000

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

(Being the compensation expense is recorded)

For recording this we debited the expense as it increased the expenses and at the same time it also increased the stockholder equity