Question

On January 1, 2016, Apple granted 80,000 stock options to key members of its executive team. Each option grants the executives the ability to purchase one share of Apples common stock ($10 par value) at a price of $40 per share. The options were exercisable within a 2-year period beginning on January 1, 2018, as long as the executives remain an employee at Apple until that date. It is assumed that the options were for services performed equally in 2016 and 2017. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000. On January 1, 2018, the Apple executives exercised 48,000 of their stock options. On that date, Apples stock had a market price of $50 per share. The remaining 32,000 stock options lapsed on January 1, 2020 because of the decision not to exercise their options.

Required

1. Prepare the necessary journal entries related to the stock option plan for the years 2016 through 2020.
2. Over what period of time should compensation cost be allocated?

Answer 1

1.)	Date	Account Titles & Explanation	Debit $	Credit $
	December 31,2016	Compensation Expense	650,000
		Additional Paid in Capital-Stock Option		650,000
		(1,300,000 / 2 )
		( To record compensation expense for 2016 )
	December 31,2017	Compensation Expense	650,000
		Additional Paid in Capital-Stock Option		650,000
		(1,300,000 / 2 )
		( To record compensation expense for 2017 )
	January 1,2018	Cash ( 48,000 x 40 )	1,920,000
		Additional Paid in Capital-Stock Option	7,80,000
		(1,300,000 x 48,000 / 80,000 )
		Common Shares ( 48,000 x 10 )		480,000
		Additional Paid in Capital-Common Shares		2,220,000
		( To record exercise of option )
	January 1,2020	Additional Paid in Capital-Stock Option	520,000
		(1,300,000 x 32,000 / 80,000 )
		Additional Paid in Capital - Expired Stock Option		520,000
		( To record lapse of option )

2.)	The Compensation expense of $ 1,300,000 will be allocated equally in year 2016 & year 2017.