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, 21 million stock options were granted, exercisable for 21 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 $10. The fair value of the 21 million options, estimated by an appropriate option pricing model, is $4 per option. Ensor chooses the option to recognize forfeitures only when they occur.

Ten percent (2.1 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 $20 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.:Record compensation expense on December 31, 2019.,Record compensation expense on December 31, 2020.,Record the exercise of the options in 2022.

Answer 1

When is Ensor’s stock option measurement date
January 1, 2018 ensor's stock option measurment january 1, 2018
21 million stock option were granted
Determine the compensation expense for the stock option plan in 2018.
Fair value of option x option granted
= 4x 21million = 84 million
the total compansation to be alloted to expense is $21 million per year
2.1 forfited
therefore 2.1/21*100= 10%
unforfeited = 90%
JOURNAL ENTRIES
2019	Particulars	Debit	Credit
	Compensation exp a/c dr(84*90%*2/3)-21	29.4
to	paid in capital - stock option		29.4
2020	Particulars	Debit	Credit
	Compensation exp Dr ( 84*90%*3/3)-21-29.4	25.2
to	paid in capital - stock option		25.2
2022	Particulars	Debit	Credit
	cash a/c dr(10*90%*25.2)	226.8
	paid in capital stock option(21+29.4+25.2)	75.6
to	common stock		25.2
	paid in capital- excess of par		277.2