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 12 million of the company’s $1 par common shares for $11 within the next six years, but not before January 1, 2024 (the vesting date). The market price of the shares on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option pricing model, is $3 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 $14 per share. 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 12 million of the company’s $1 par common shares for $11 within the next six years, but not before January 1, 2024 (the vesting date). The market price of the shares on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option pricing model, is $3 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 $14 per share.

Answer 1

1)Determination of total compensation cost
Vesting priod   = 3 years (Jan 1, 20121 to Jan 1,2024) Total compensation cost = No. of Options Granted   x Fair value                                             =      $12 million option x $3                                             =   $36 million
2 to 5) Preparation of Appropriate Journal Entries
Date	Account Tittle and Explanation	Debit (in $ million)	Credit (in $ millions)
Dec 31 ,2021	Compensation Expense ($36 million / 3 years)	$12
	Paid in Capital-Stock Options		$12
	(To record the compensation expense in 2021)
Date	Account Tittle and Explanation	Debit (in $ million)	Credit (in $ millions)
Dec 31 ,2022	Compensation Expense	$12
	Paid in Capital-Stock Options		$12
	(To record the compensation expense in 2022)
Date	Account Tittle and Explanation	Debit (in $ million)	Credit (in $ millions)
Dec 31 ,2023	Compensation Expense	$12
	Paid in Capital-Stock Options		$12
	(To record the compensation expense in 2023)
Date	Account Tittle and Explanation	Debit (in $ million)	Credit (in $ millions)
May - 11 ,2025	Cash ( 12 Million x $11)	$132
	Paid in Capital- Stock Option ( 12 Million x $3)	$36
	Common Stock                       ( 7 Million x $1))		$12
	Paid in Capital - Excess of Par                               (Bal. fig)		$156
	(To record the exercise of stock option)