Question

Schmidt Electronics offered an incentive stock plan to its employees. On January​ 1, Year​ 1, 90 comma 000 options were granted for 90 comma 000 ​$1 par common shares. The exercise price equals the​ $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January​ 1, Year​ 4, and expire on December​ 31, Year 5. Each option has a value of $ 6 based upon an option pricing model. At the end of the first​ year, it is expected that​ 100% of employees will exercise the options. By the end of Year​ 2, it is expected that only​ 80% of the options will be exercised. Schmidt chooses to adjust the fair value of the options for the estimated forfeitures. What is the journal entry to record compensation expense for year​ 2? ​ (Do not round intermediate calculations. Only round your final answer to the nearest​ dollar.)

Answer 1

The journal entry to record compensation expense for Year 2 in the Schmidt Electronics incentive stock plan is: Debit Compensation Expense $480,000, Credit APIC - Stock Options $480,000.

Step-by-step explanation:

The journal entry to record compensation expense for year 2 in the Schmidt Electronics incentive stock plan would be as follows:

1. Debit Compensation Expense $480,000
2. Credit APIC - Stock Options $480,000

This journal entry is made to reflect the estimated forfeitures of 20% of the options, as stated in the question. The compensation expense is debited to recognize the cost of the options being granted to the employees, and the APIC - Stock Options account is credited to reflect the increase in the additional paid-in capital related to the stock options.