Question

On January 1, 2018, Hugh Morris Comedy Club (HMCC) granted 1.4 million stock options to key executives exercisable for 1.4 million shares of the company’s common stock at $30 per share. The stock options are intended as compensation for the next three years. The options are exercisable within a four-year period beginning January 1, 2021, by the executives still in the employ of the company. No options were terminated during 2018. The market price of the common stock was $32 per share at the date of the grant. HMCC estimated the fair value of the options at $6 each. 1% of the options are forfeited during 2019 due to executive turnover. What amount should HMCC record as compensation expense for the year ended December 31, 2019, assuming HMCC chooses the option to record forfeitures as they actually occur?

Answer 1

Determine the amount of compensation expense for thr year ended 31 december 2019, assuming HMCC chooses the option to record the forfeiture:

PARTICULARS	AMOUNT
Estimated future value of option	$6
Options granted	1,400,000
Total compensation	8,400,000
Number of years	3 years
Compensation expense per year	2,800,000

Now adjust the cumulative amount of compensation expense recorded to date in year in forfeiture occurs.

The journal entry is to record the compensation expense per year.To record the entry ,debit compensation expense and credit paid in capital - stock options as shown below:

Date	Acount Title	Debit ($)	Credit ($)
	Compensation Expense	2,800,000
	Paid in capital - stock options		2,800,000
	(to record the compensation expense)

On december 31,2019 the entry is to record the compensation expense .To record the entry debit compensation expenseand credit paid up capital- stock options as shown below:

Date	Account Title	Debit ($)	Credit ($)
Dec 31	Compensation Expense (8,400,000-(1%*8,400,000*2/3) - 2,800,000*2)	2,744,000
	Paid in capital - stock options (to record the compensation expense)		2,744,000