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 5,600 stock options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant.

Exercise price for options $38
Market price at grant date (January 1, 2017) $38
Fair value of options at grant date (January 1, 2017) $6
Service period 5 years
A. Prepare the journal entries for the first year of the stock-option plan. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
B. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017
C. Now assume that the market price of Amazon stock on the grant date was $46 per share. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

Answer 1

See the journal entries and explanations below:

Step-by-step explanation:

A. Prepare the journal entries for the first year of the stock-option plan.

We first calculate the Compensation Expense as follows:

Compensation Expense = (Number stock options outstanding * Fair value of options at grant date) / Service period = (5,600 * $6) / 5 = $6,720.

Note: There is no journal entry for January 1, 2017.

The journal entry for December 31, 2017 is as follows:

Date Details Dr ($) Cr ($)

31 Dec. 2017 Compensation Expense 6,720

Paid-in Capital - Stock Options 6,720

To record compensation expenses for 2017.

B. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

We first calculate the following:

Unearned Compensation at January 1, 2017 = Number of option * Exercise price = 700 * $38 = $26,600

Common stock at January 1, 2017 = Stock par value * Number of option = $1 * 700 = $700

Compensation Expense at December 31, 2017 = January 1, 2017 Unearned Compensation / Service period = $26,600 / 5 = $5,320

The journal entries will be as follows:

Date Details Dr ($) Cr ($)

31 Jan. '17 Unearned Compensation 26,600

Common stock 700

Paid-in Capital in excess of par 25,900

To record unearned compensation on January 2017.

01 Dec. '17 Compensation Expense 5,320

Unearned Compensation 5,320

To record compensation expenses for 2017.

C. Now assume that the market price of Amazon stock on the grant date was $46 per share. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

We first calculate the following:

Unearned Compensation at January 1, 2017 = Number of option * Exercise price = 700 * $46 = $32,200

Common stock at January 1, 2017 = Stock par value * Number of option = $1 * 700 = $700

Compensation Expense at December 31, 2017 = January 1, 2017 Unearned Compensation / Service period = $32,200 / 5 = $6,440

The journal entries will be as follows:

Date Details Dr ($) Cr ($)

31 Jan. '17 Unearned Compensation 32,200

Common stock 700

Paid-in Capital in excess of par 31,500

To record unearned compensation on January 2017.

01 Dec. '17 Compensation Expense 6,440

Unearned Compensation 6,440

To record compensation expenses for 2017.