Information from the financial statements of Ames Fabricators, Inc., included the following: On October 15,...

Information from the financial statements of Ames Fabricators, Inc., included the following:

On October 15, 2020, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2021, 23 million stock options were granted, exercisable for 23 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2024, and December 31, 2026, at 90% of the quoted market price on January 1, 2021, which was $20. The fair value of the 23 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 (2.3 million) of the options were forfeited when an executive resigned in 2022. All other options were exercised on July 12, 2025, when the stock’s price jumped unexpectedly to $22 per share. Required: 1. When is Ensor’s stock option measurement date? 2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.) 3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023. 5. Prepare the journal entry to account for the exercise of the options in 2025.

Ames’s net income for the year ended December 31, 2021, is $900,000. The income tax rate is 25%. Ames paid dividends of $5 per share on its preferred stock during 2021.

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in thousands (For example, 100,000 should be entered as 100). Do not round intermediate calculations.)

Solutions

Expert Solution

Dear student, we cannot able to post solution more than four sub-parts of the question as per our policy.

Part 1

When is Ensor’s stock option measurement date?
options were granted			On January 1, 2021
Option measurement date			On January 1, 2021

Part 2

Determine the compensation expense for the stock option
Options granted	23	Millions
Multiply: Estimated fair value per option	$ 6
fair value of option	$ 138	Millions
Divided by: Number of years in vesting period (2021,2022, and 2023)	3	Years
Compensation expense for the stock option plan in 2021	$ 46	Millions

Part 3

Cumulative Compensation expense Up to Year 2022 (13890%2/3)			82.8
Less: recognized in earlier year (Answer 2)			46.0
Compensation expense For Year 2022			36.8

Cumulative Compensation expense Up to Year 2023 (13890%3/3)			124.2
Less: recognized in earlier year			82.8
Compensation expense For Year 2023			41.4

Date	General journal	debit	Credit
2022	Compensation expense	36.8
	Paid in capital – stock options		36.8
	(To record Compensation expense.)

2023	Compensation expense	41.4
	Paid in capital – stock options		41.4
	(To record Compensation expense.)

Part 4 (Answer 5)

exercisable price = 20*90% = 18		18
Number of options are exercisable = 23 - 2.3 = 20.7 millions		20.7

Date	General journal	debit	Credit
July 12, 2025	Cash (20.7*18)	372.6
	Paid-in capital - stock options (20.7*6)	124.2
	Common stock (20.7*1)		20.7
	Paid-in capital – excess of par (Remaining value)		476.1
	(To record options are exercised.)

ekkarill92 answered 1 year ago

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