Question

On October 15, 2017, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2018, 32 million stock options were granted, exercisable for 32 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2021, and December 31, 2023, at 90% of the quoted market price on January 1, 2018, which was $20. The fair value of the 32 million options, estimated by an appropriate option pricing model, is $3 per option. Ensor chooses the option to recognize forfeitures only when they occur.

Ten percent (3.2 million) of the options were forfeited when an executive resigned in 2019. All other options were exercised on July 12, 2022, when the stock’s price jumped unexpectedly to $31 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2018. (Ignore taxes.)
3. & 5. Prepare the necessary journal entries.

Answer 1

1)January 1,2018 is the Ensor’s stock option measurement date. Its always the date of Grant

2)the compensation expense for the stock option plan in 2018 = Estimated Fair value per option* Option Granted

= $3*$32 million = $96million

The total compensation is required to be expensed over the vesting period of three years (1/1/2021/12/31/2023)

= $96 million / 3 years = $32 million per year

the compensation expense for the stock option plan in 2018 is $32million

3)Amounts in millions

Date	General Jornal	Debit	Credit
2019	Compensation Expense	$25.6
	Paid in Capital - Stock Option		$25.6
	(($96million*90%*2/3)-$32million)
	(To record Compensation)
2020	Compensation Expense	$28.8
	Paid In capital- Stock Option		$28.8
	(($96m*90%*3/3)-$32m-$25.6m)
2022	Cash($18*28.8 Million)**	$518.4
	Paid In capital- Stock Option($32+$25.6+$28.8)	86.4
	Common Stock($1*28.8)		$28.8
	Paid In capital- In excess of par value(Balancing Figure)		$576

**$20*90%=$18, 90% were exercised which means 32million*90% =28.8million

Market value is irrelavant here.