Question

American Optical 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, 2016, that permit executives to acquire 4 million of the company's $1 par common shares within the next five years, but not before December 31, 2017 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 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, 2016.

(3) Prepare the appropriate journal entry to record compensation expense on December 31, 2016.

Answer 1

Date of Grant options	January 1, 2016
Date of Vesting options	December 31, 2017
Number of years	2 Years
Total compensation cost pertaining to the options.
Stock options	4	Millions
Multiply: Fair value	$                                                                                              3
Total compensation cost pertaining to the options.	$                                                                                            12	Millions

All amount expressed in millions dollars.
Date	General journal	Debit	Credit
January 1, 2016	No Journal entry required for grant date.
December 31, 2016	Compensation expense	6
	Paid in capital - restricted stock		6
	(To record Compensation expense.) (12/2)
December 31, 2017	Compensation expense	6
	Paid in capital - restricted stock		6
	(To record Compensation expense.) (12/2)