Question

Exercise 19-9 (Algo) Stock options; exercise [LO19-2]

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 23 million of the company’s $1 par common shares for $12 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 $14 per share. The fair value of the 23 million options, estimated by an appropriate option pricing model, is $3.60 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 $15 per share.

Answer 1

1) The total compensation cost pertaining to the incentive stock option plan.
# of options granted	23	Million
Fair value of each option	x $3.60
Total compensation	82.8	Million
2)
Date	Account Titles and Explanation	Debit	Credit
1-Jan-21	No Entry
	To record the award of options
31-Dec-21	Compensation expense ($82.8 million ÷ 3)	$       27.60
	Paid in capital – stock options		$       27.60
	To record compensation expense
31-Dec-22	Compensation expense ($82.8 million ÷ 3)	$       27.60
	Paid in capital – stock options		$       27.60
	To record compensation expense
31-Dec-23	Compensation expense ($82.8 million ÷ 3)	$       27.60
	Paid in capital – stock options		$       27.60
	To record compensation expense
3)
11-May-25	Cash ($12 exercise price x 23 million shares)	$     276.00
	Paid-in capital—stock options ($27.6 million x 3 years)	$       82.80
	Common stock (23 million shares at $1 par per share)		$       23.00
	Paid-in capital—excess of par (to balance)		$     335.80
The market price at exercise is irrelevant.