Question

SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2021. The options permit holders to acquire 9 million of the company’s $1 par common shares for $25 within the next six years, but not before January 1, 2024 (the vesting date). The market price of the shares on the date of the grant is $27 per share. The fair value of the 9 million options, estimated by an appropriate option pricing model, is $7.50 per option.

Required:

1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. & 3. Prepare the appropriate journal entries to record compensation expense on December 31, 2021, 2022, and 2023. Record the exercise of the options if all of the options are exercised on May 11, 2025, when the market price is $28 per share.

2 and 3.Prepare the appropriate journal entries to record compensation expense on December 31, 2021, 2022, and 2023. Record the exercise of the options if all of the options are exercised on May 11, 2025, when the market price is $28 per share. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Answer
1)	Calculation of Total Compensation Cost =
	= Option Granted * Fair Value Per Option
	= 9 million * $7.50
	= 67.5 million
2)	Journal Entries
Date	Particulars	Debit($)	Credit($)
Dec 31, 2021	Compensation Expense A/c Dr. ($67.5 million / 3 yr)	22.5 million
	To Paid in Capital - Stock Options A/c		22.5 million
Dec 31, 2022	Compensation Expense A/c Dr.	22.5 million
	To Paid in Capital - Stock Options A/c		22.5 million
Dec 31, 2023	Compensation Expense A/c Dr.	22.5 million
	To Paid in Capital - Stock Options A/c		22.5 million
3) Journal Entry :- (Option Exercised at Exercise price)
	Particulars	Debit($)	Credit($)
	Cash A/c Dr.(9 million share * $25 exercise price)	225 million
	Paid in Capital - Stock Option a/c Dr. ($22.5 million * 3 yr)	67.5 million
	To, Common Stock A/c (9 million shares * $1)		9 million
	To, Paid in Capital- Excess of Par (Bal. /F)		283.5 million
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