Question

Heidi Software Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2021, that permit executives to acquire 11 million of the company’s $1 par common shares within the next five years, but not before December 31, 2022 (the vesting date). The exercise price is the market price of the shares on the date of grant, $52.00 per share. The fair value of the 11 million options, estimated by an appropriate option pricing model, is $12 per option. No forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry to record the award of options on January 1, 2021.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2022.

Answer 1

1).
	Total compensation cost pertaining to options                          = No. of Options Granted x Estimated Fair Value                          =    11 million options x $ 12                         = $ 132 million
	Total Compensation cost = $ 132 million
	Vesting period = Jan 1 ,2021 to Dec 31 , 2022 = 2 Years
Date	Accounts Titles and explanation	Amount (in $ millions)	Amount (in $ millions)
January 01, 2021	No Entry	-	-
	(No entry on the date of Grant)
December 31 ,2021	Compensation Expense           ($ 132 million / 2 )	$ 66
	Paid-in-capital - Stock option		$ 66
	(To record the compensation Expense)
December 31 ,2022	Compensation Expense           ($ 98 million / 2 )	$ 66
	Paid-in-capital - Stock option		$ 66
	(To record the compensation Expense)