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On January 1, 2018, David Corp. grants options that permit key executives to acquire 32 million...

On January 1, 2018, David Corp. grants options that permit key executives to acquire 32 million of the company's $1 par common shares within the next 8 years, but not before December 31, 2021 (the vesting date). The exercise price is $27 per share. The fair value of the options, estimated by an appropriate option-pricing model, is $7 per option.

David Corp.'s policy is to estimate option forfeitures. Originally, a forfeiture rate of 3% was expected. During 2020, the third year, David Corp. revised its estimate of forfeitures from 3% to 7%.

What are the journal entry for 2018, 2019, 2020 and 2021 to record compensation expense, considering expected forfeitures.

Solutions

Expert Solution

Working note for Compensation Expense
Year 2018 2019 2020 2021
a)No. of options 32000000 32000000 32000000 32000000
b)Expected Forfeiture 3% 3% 7% 7%
c)Fair value of option 7 7 7 7
d)Cumulative Compensation Expense= (a)*(100%-b)*Fair value* completed years/4 54320000 108640000 156240000 208320000
e) Compensation expense for the year 54320000 54320000 101920000 106400000
Date Journal Entries Debit Credit
2018 Employee benefit expense 54320000
Stock based payment reserve 54320000
(To record compensation expense for year 2018)
2019 Employee benefit expense 54320000
Stock based payment reserve 54320000
(To record compensation expense for year 2018)
2020 Employee benefit expense 101920000
Stock based payment reserve 101920000
(To record compensation expense for year 2018)
2021 Employee benefit expense 106400000
Stock based payment reserve 106400000
(To record compensation expense for year 2018)

ekkarill92 answered 1 year ago
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