Question

On January 1, 2019, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols' $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2021, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols' stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. On May 1, 2021, 8,000 options were exercised when the market price of Nichols' stock was $30 per share. The remaining options lapsed in 2023 because executives decided not to exercise their options. Instructions: Prepare the necessary journal entries related to the stock option plan for the years 2019 through 2023.

Answer 1

1/1/19 No entry on the date of the grant

12/31/19

Dr Compensation expense200,000

Cr Paid-in capital-stock options200,000

12/31/20

Dr Compensation expense200,000

Cr Paid-in capital-stock options200,000

5/1/21

Dr Cash 160,000

Dr Paid-in capital-stock options 320,000

Cr Common stock 40,000

Cr Paid-in capital in excess of par 440,000

1/1/23

Dr Paid-in capital-stock options 80,000

Cr Paid-in capital-expired options 80,000

Step-by-step explanation:

Preparation of the necessary journal entries that is related to the stock option plan for the years 2019 through 2023.

1/1/19 No entry on the date of the grant

12/31/19

Dr Compensation expense200,000

Cr Paid-in capital-stock options200,000

(400,000×1/2)

12/31/20

Dr Compensation expense200,000

Cr Paid-in capital-stock options200,000

($400,000 x 1/2)

5/1/21

Dr Cash 160,000

(8,000 x $20)

Dr Paid-in capital-stock options 320,000

($400,000 x 8,000 / 10,000 = $320,000)

Cr Common stock 40,000

(8,000 x $5)

Cr Paid-in capital in excess of par 440,000

(320,000+160,000-40,000)

1/1/23

Dr Paid-in capital-stock options 80,000

Cr Paid-in capital-expired options 80,000

($400,000–$320,000)