Question

On January 1, Year 1, Nini Tech Corp granted options to its new CEO, Jane Black, which allows Jane to purchase 45,000 shares of $1.00 par value ordinary share for $40.00 per share. The options can be exercise after December 31, Year 3 and expire at March 31, Year 4. On the grant date, the market price of the share was $30.00 per share. Using an acceptable option valuation model, Nini decided that the options had a fair value of $240,000 on the grant date. The options serve as compensation for services rendered during the first three years.

Required:

1. Prepare the journal entry on grant date.

2. Prepare the journal entries for all three years to record compensation expense.

3. Prepare the journal entry assuming one half of the options are exercised on January 1, Year 4.

4. Prepare the journal entry for the expiration of the options not exercised on January 1, Year 4.

Answer 1

ANSWER:

Par value per share = $1.00

Option Excercisable after = Dec 31 (Year 3)

Option valid till = Mar 1 (Year 4)

Option fair value at the grant date = $240,000

Required Journal Entries:

sno.	Particulars	Amount	Amount
1	There will not be any journal entry on the grant date as it is offered as a compensation for service offered starting from grant date. Since, on grant date there is no service offered, there will be no journal entry.
2	Since, fair value of option is $240,000 for 3 years of compensation, therefore eacb year compensation will be charged at $80,000 (240,000 / 3) each year.
Dec 31 (Year 1)	Compensation Expense	80,000
	To Additional paid in capital - stock options		80,000
Dec 31 (Year 2)	Compensation Expense	80,000
	To Additional paid in capital - stock options		80,000
Dec 31 (Year 3)	Compensation Expense	80,000
	To Additional paid in capital - stock options		80,000
3	half of the options are exercised on January 1, Year 4
Jan 1 (Year 4)	Cash [(45,000 / 2) * 40]	900,000‬
	Additional paid in capital - stock option	900,000‬
	To Common stock		1,800,000
4	expiration of the options not exercised on January 1, Year 4
Jan 1 (Year 4)	Additional paid in capital - stock options	900,000
	To Additional paid in capital - Expired stock options		900,000