Question

On October 15, 2020, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2021, 20 million stock options were granted, exercisable for 20 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2024, and December 31, 2026, at 80% of the quoted market price on January 1, 2021, which was $15. The fair value of the 20 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 (2 million) of the options were forfeited when an executive resigned in 2022. All other options were exercised on July 12, 2025, when the stock’s price jumped unexpectedly to $39 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.)
3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023.
5. Prepare the journal entry to account for the exercise of the options in 2025.

Please provide explanation for each part

Answer 1

1) The stock option measurement date is January 1,2021

Explanation:

The measurement date of the stock option is the day in which stock options were granted.

2) Compensation expenses for 2021 = $ 20 Million

Explanation :

Total compensation expenses = Number of stock options granted * Fair value per stock option

Total compensation expenses = 20 Million stock options * $ 3 per stock option

Total compensation expenses = $ 60 Million

Vesting periods is 3 Years ( From 01/01/2021 to 31/12/2023)

Compensation expenses for 2021 = Total Compensation expenses / Vesting period

Compensation expenses for 2021 = $ 60 Million / 3 Years

Compensation expenses for 2021 = $ 20 Million

3)
Date	General Journal	Debit	Credit
2022	Compensation expense	$ 16 Million
	Paid-in-Capital - stock options		$ 16 Million
	(To record Compensation expenses for 2022 )
2022	Compensation expense	$ 18 Million
	Paid-in-Capital - stock options		$ 18 Million
	(To record Compensation expenses for 2023 )

Explanation :

In 2022 , 2 Million of the stock options was forfeited i.e 10 % of stock options

the remaining percentage represent the unforfeited = 100 % - 10 % = 90 %

For 2022 :

Total Compensation expenses of 2022 = [ $ 60 Million * 90 %*2/3 - $ 20 Million ]

Total Compensation expenses of 2022 = $ 16 Million

For 2023 :

Total Compensation expenses of 2023 = [ $ 60 Million * 90 %*3/3 - $ 20 Million -$16 Million ]

Total Compensation expenses of 2023 = $ 18 Million

5)
Date	General Journal	Debit	Credit
July 12,2025	Cash (18 Million Stock option* $ 12 )	$ 216 Million
	Paid-in-Capital - stock options (18 Million stock option * $ 3)	$ 54 Million
	Common stock (18 Million shares *$ 1 )		$ 18 Million
	Paid-in-Capital-excess of par ($216+$54 -$18) Million		$ 252 Million
	(To record Exercise of the stock options in July 12,2025 )

Explanation :

Number of shares excercised = 20 Million - 2 Million = 18 Million Stock options

The Exercisable period between January 1,2024 and December 31,2026 at 80 % of quoted

market price on January 1,2021 is $ 15

The Exercise price of stock = $ 15 *80 % = $ 12