On December 1, 2018, Folks Wagon Company adopted a stock-option plan that granted options to key...

On December 1, 2018, Folks Wagon Company adopted a stock-option plan that granted options to key executives to purchase 50,000 shares of the company’s $10 par value common stock. The options were granted on January 1, 2019, and were exercisable 3 years after the date of grant if the grantee was still an employee of the company. The options expired 5 years from the date of grant. The option price was set at $35, and the fair value option-pricing model determines the total compensation expense to be $450,000.

All of the options were exercised during the year 2022: 20,000 on February 23 when the market price was $46, and 30,000 on August 8 when the market price was $85 a share.

a. Prepare the journal entries relating to the stock option plan for the years 2019, 2020, and 2021. Assume that the employee performs services equally in 2019, 2020, and 2021.

b. Prepare the journal entries that record the two events of exercising the options in 2022.

Expert Solution

a	Date	Accounts	Dr($)	Cr($)
	Jan 1, 2019	No Entry (Compensation expense-$450,000 Given)

	Dec 31, 2019	Compensation Expense	$ 150,000
		Paid-in Capital—Stock Options		$ 150,000
		(Compensation expense being recorded for 2019, 1/3 x $450,000)

	Dec 31, 2020	Compensation Expense	$ 150,000
		Paid-in Capital—Stock Options		$ 150,000
		(Compensation expense being recorded for 2020, 1/3 x $450,000)

	Dec 31, 2021	Compensation Expense	$ 150,000
		Paid-in Capital—Stock Options		$ 150,000
		(Compensation expense being recorded for 2021, 1/3 x $450,000)

b	Feb 23, 2022	Cash (20,000 X $35)	$ 700,000
		Paid-in Capital—Stock Options ($450,000 X 20,000/50,000)	$ 180,000
		Common Stock (20,000 X $10)		$ 200,000
		Paid-in Capital in Excess of Par		$ 680,000
		(To record the issuance of stock against stock options of 20000 at price of $35)

	Aug 8, 2022	Cash (30,000 X $35)	$ 1,050,000
		Paid-in Capital—Stock Options ($450,000 X 30,000/50,000)	$ 270,000
		Common Stock (30,000 X $10)		$ 300,000
		Paid-in Capital in Excess of Par		$ 1,020,000
		(To record the issuance of stock against stock options of 30000 at price of $35)

ekkarill92 answered 8 months ago

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