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, 21 million stock options were granted, exercisable for 21 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 $10. The fair value of the 21 million options, estimated by an appropriate option pricing model, is $4 per option. Ensor chooses the option to recognize forfeitures only when they occur. Ten percent (2.1 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 $20 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

1.When is Ensor’s stock option measurement date?

On January 1, 2018, 21 million stock options were granted

2. Determine the compensation expense for the stock option plan in 2018

Estimated fair value per option * options granted

$4*21 million = $84 million

The total compensation needs to be allocated to expense over the three-year service (vesting) period: 2018 – 2020 = $84million/3 years = $28 million per year

3.Journal Entries

JOURNAL ENTRIES
2019	Particulars	Debit	Credit
	Compensation exp a/c dr(84*90%*1/3)	25.2
	Paid in capital - stock option		25.2
2020	Particulars	Debit	Credit
	Compensation exp Dr ( 84*90%*2/3)=50.40-25.20=	25.2
	Paid in capital - stock option		25.2
2021	Particulars	Debit	Credit
	Compensation exp Dr ( 84*90%*3/3)=75.6-25.20-25.20=25.20	25.2
	Paid in capital - stock option		25.2
2022	Particulars	Debit	Credit
	cash a/c (10*90%*21)	189
	paid in capital stock option(25.2*3)	75.6
	common stock		18.9
	paid in capital- excess of par		245.7
	Note:
	21 millions*10*90%=189 millions and No of shares=$10 and Par value=$1
	No of shares 18.90 million shares 1