Question

On November 1, 2017, Sandhill Company adopted a stock-option plan that granted options to key executives to purchase 28,500 shares of the company’s $10 par value common stock. The options were granted on January 2, 2018, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $30, and the fair value option-pricing model determines the total compensation expense to be $427,500.

All of the options were exercised during the year 2020: 19,000 on January 3 when the market price was $67, and 9,500 on May 1 when the market price was $77 a share.

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performs services equally in 2018 and 2019.

Answer 1

Date	journal	debit	credit
2/1/2018	no entry	$0
	(Total compensation expense is $427500)		$0
31/12/2018	compensation expense	$213750
	To paid in capital - stock.option		$213750
	(To record the compensation expense for the year 2018 $427500 × 1/2)
31/12/21019	compensation expense	$213750
	To paid in capital - stock option		$213750
	(To record compensation expense for the year 2019 $427500× 1/2)
03/1/2020	cash (19000 × $30)	$570000
	Paid in capital - stock option( $427500 × 19000/28500)	$285000
	To common stock (19000 × $10)		$190000
	To.paid in capital in excess of par		$665000
	( To record issuance of 19000 shares of $10 par value stock upon exercise of options at option price of $30)
1/05/2020	cash(9500 × $30)	$285000
	Paid in capital - stock.option ($427500 × 9500/28500)	$142500
	To common stock (9500 × 10)		$95000
	To paid in capital in excess of par		$332500
	( To record issuance of 9500 shares of $10 par value stock upon exercise of options at option price of $30)

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