Question

On October 15, 2020, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2021, 30 million stock options were granted, exercisable for 30 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2024, and December 31, 2026, at 80% of the quoted market price on January 1, 2021, which was $15. The fair value of the 30 million options, estimated by an appropriate option pricing model, is $5 per option. Ensor chooses the option to recognize forfeitures only when they occur.

Ten percent (3 million) of the options were forfeited when an executive resigned in 2022. All other options were exercised on July 12, 2025, when the stock’s price jumped unexpectedly to $30 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.)
3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023.
5. Prepare the journal entry to account for the exercise of the options in 2025.

Answer 1

Answer :

(1).

Stock option measurement date is the option grant date. Hence January 1.2021 us the Ensor's stock option measurement date.

(2).

Estimated fair value per option = $5

Options granted = 30 million

Fair value of award = 30 million* $5 = 150 million

The total expense is to be allocated over the vesting period 3 years from January 1.2020 to January 1.2024

Compensation expense for the stock option plan in 2021 = 30 million * $5(fair value of option)/3 = $50 million

(3).

10% of the options were forfeited when an executive resigned in 2022

Date	General Journal	Debit ($ in million)	Credit ($ in million)	Explanation
2022	Compensation expese	58	-	(30 million*90%*6*2/3-50 million)
	To paid in capital - stock options	-	58	-
	(To record compension expense for 2022)	-	-	-
2023	Compensation expense	54	-	(30 million *90%*6*3/3 - 50 million - 58 million)
	To Paid capital - Stock options	-	54	-
	(To Record compensation expense for 2023	-	-	-

(5).

Exercise of options in 2025

Date	General Journal	Debit ($ in million)	Credit ($ in million)	Explanation
2025	Cash	324	-	(27 million * 15*80%)
	Paid in capital - stock options	162	-	(27 million *6)
	To Common stock	-	27	(27 million *$1)
	To Paid in capital - excess of par	-	459	-
	(To Record exercise of option in 2025	-	-	-