Question

On October 15, 2017, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2018, 25 million stock options were granted, exercisable for 25 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2021, and December 31, 2023, at 90% of the quoted market price on January 1, 2018, which was $20. The fair value of the 25 million options, estimated by an appropriate option pricing model, is $6 per option. Ensor chooses the option to recognize forfeitures only when they occur.

Ten percent (2.5 million) of the options were forfeited when an executive resigned in 2019. All other options were exercised on July 12, 2022, when the stock’s price jumped unexpectedly to $24 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2018. (Ignore taxes.)
3. & 5. Prepare the necessary journal entries.

Answer 1

When is Ensor’s stock option measurement date?

On January 1, 2018, 25 million stock options were granted

Determine the compensation expense for the stock option plan in 2018.
Options granted	25	Millions
Multiply: Estimated fair value per option	$             6
fair value of option	$        150	Millions
Divided by: Number of years in vesting period (2018,2019, and 2020)	3	Years
Compensation expense for the stock option plan in 2018.	$          50	Millions

Percentage of option forfeited (2.5/25)			10%
Percentage of option unforfeited (100%-10%)			90%
Date	General journal	debit	Credit
2019	Compensation expense	40
	Paid in capital – stock options		40
	(To record Compensation expense.)
2020	Compensation expense	45
	Paid in capital – stock options		45
	(To record Compensation expense.)
Cumulative Compensation expense Up to Year 2019 (150*90%*2/3)			90
Less: recognized in earlier year (Answer 1)			50
Compensation expense For Year 2019			40
Cumulative Compensation expense Up to Year 2020 (150*90%*3/3)			135
Less: recognized in earlier year			90
Compensation expense For Year 2020			45

Date	General journal	debit	Credit
July 12, 2022	Cash (22.5*18)	405
	Paid-in capital - stock options (22.5*6)	135
	Common stock (22.5*1)		22.5
	Paid-in capital – excess of par (Remaining value)		517.5
	(To record options are exercised.)
	(Hint: market price at exercise is irrelevant.)
	options are exercisable at 90% of the quoted market price on January 1, 2018, which was $20. (exercisable price = 20*90% = 18)
	Number of options are exercisable = 25 - 2.5 = 22.5 millions

In case of any entry is missing then inform me,