Question

In: Accounting

1) On January 1, 2018, AAA Co. granted 1,000 employee stock options with an exercise price...

1) On January 1, 2018, AAA Co. granted 1,000 employee stock options with an exercise price of $5 per share. On January 1, 2018, AAA Co.’s stock had a market price of $5 per share and the options had an estimated value from an options pricing model of $2.50 each. The options vest on December 31, 2019. AAA expects an 80% vesting rate. a. What compensation expense is recorded in 2018 for the above stock option plan? What journal entry will AAA make? b. On December 31, 2019, AAA observes that 850 options actually vest. What compensation expense is recorded in 2019 for the above stock option plan? c. What journal entry will AAA make on June 30, 2020 when 500 of the options are exercised and the market price of the shares is $12?

Solutions

Expert Solution

(1) Number of options granted = 1000

Value of options as per option pricing model = $2.50 each

Vesting period = 2 years

Vesting Rate = 80%

Compensation Expense for 2018 = [(Number of options granted * Vesting Rate) * Value per option] / Vesting Period

= [(1000 * 80%)*2.50] / 2

= $ 1000

Journal entry:

Employee Stock Option Expense A/c Dr. $1,000

To Employee Stock Option Outstanding A/c Cr. $1,000

(Being proportionate expense recorded for stock options)

(2) Number of options vested on 31 Dec, 2019 = 850

Total compensation expense for ESOP = (Number of options vested * Value per option) = 850 * $2.5 = $2,125

Compensation expense for 2019 = Total compensation expense (-) Compensation expense recognized in 2018

= $2,125 (-) $1,000 = $1,125

Journal entry:

Employee Stock Option Expense A/c Dr. $1,125

To Employee Stock Option Outstanding A/c Cr. $1,125

(Being proportionate expense recorded for stock options)

(3) Journal entry on exercise of 500 options on Jun 30, 2020

Cash / Bank A/c (500 options * $5) Dr. $2,500

Employee Stock Option Outstanding A/c (500 options * $2.5) Dr. $1,250

To Common Stock A/c (500 options * face value of $1) Cr. $500

To Share premium A/c [500 options * ($5 + $2.5 - $1)] Cr. $3,250

(Being 500 stock options exercised)

(Note: The market value of share at the time of exercise of options i.e. $12 is not relevant)


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