Question

On January 1, 2021, Ayayai Inc. granted stock options to officers and key employees for the purchase of 18,000 shares of the company’s $10 par common stock at $27 per share. The options were exercisable within a 5-year period beginning January 1, 2023, by grantees still in the employ of the company, and expiring December 31, 2027. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $379,600.

On April 1, 2022, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was $35 per share on this date. On March 31, 2023, 12,000 options were exercised when the market price of the common stock was $40 per share.
Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2021, 2022, and 2023.

Answer 1

1/1/2021 No entry

12/31/2021 Compensation Expense 189,800

Paid-in Capital-Stock Options 189,800

($379,600 × 1/2)

(To recognize compensation expense for 2021)

4/1/2022 Paid-in Capital-Stock Options 21,088.89

Compensation Expense 21,088.89

($189,800 × [2,000 ÷ 18,000])

(To record termination of stock options held by resigned employees)

12/31/2022 Compensation Expense 170,820

Paid-in Capital-Stock Options 170,820

($379,600 × 1/2 × 18/20)

(To recognize compensation expense for 2022)

3/31/2023 Cash (12,000 × $27) 324,000

Paid-in Capital-Stock Options 253,066.67

($379,600 × [12,000 ÷ 18,000])

Common Stock 120,000

Paid-in Capital in Excess of Par 457,066.67

(To record exercise of stock options)

Step-by-step explanation: