Question

On January 1, 2019, the Julbeth Corporation grants its executives options to purchase 10,000 shares of the company’s $1 par common stock at a price of $25 per share. The options are exercisable beginning in two years and expire in four years. The fair value of the options is estimated to be $60,000 based on an appropriate option pricing model.

Required:

1. Create the journal entries to record compensation expense in each applicable year.

2. Create the journal entries to record the exercise of 7,000 options in 2019.

Requirement 1- Entry to record expense for both 12/31/19 and 12/31/20:

Requirement 2 - Entry to record exercise of options:

Answer 1

ENTRY FOR RECORDING EXPENSES:-

12/31/19   EMPLOYEE COMPENSATION A/C            DR    300,000,000

                          TO EMPLOYEE STOCK OPTION RESERVE A/C                            300,000,000

                ( EXPENSES RECORDED )

               PROFIT & LOSS A/C                                                     DR   300,000,000

                           TO EMPLOYEE COMPENSATION A/C                                         300,000,000

                ( EXPENSES WRITTEN OFF )

12/31/20 EMPLOYEE COMPENSATION A/C            DR   300,000,000

                          TO EMPLOYEE STOCK OPTION RESERVE A/C                           300,000,000

                ( EXPENSES RECORDED )

               PROFIT & LOSS A/C                                                     DR   300,000,000

                           TO EMPLOYEE COMPENSATION A/C                                         300,000,000

               ( EXPENSES OF WRITTEN OFF )

WORKING NOTE :

CALCULATION OF EXPENSES

FORMULA : ( NO OF SHARES EXPECTED TO BE TAKEN * FAIR VALUE ) / NO OF YEARS

EXPENSES FOR EACH YEAR

(10000 * 60000) / 2 = 300,000,000

ENTRY TO RECORD EXERCISE OF OPTIONS :-

   BANK A/C (10000*25)                                           DR    250,000      

   EMPLOYEE STOCK OPTION RESERVE A/C ( 10,000 * 60,000)    DR    600,000,000

              TO EQUITY SHARE CAPITAL A/C ( 10000 * 1 )                                                 10,000

              TO SECURITIES PREMIUM A/C                                                                           600,240,000

     ( SHARES ALLOTMENT )