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, 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, 2024, and December 31, 2026, at 90% of the quoted market price on January 1, 2021, 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 2022. All other options were exercised on July 12, 2025, 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 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.

Answer 1

1.)	Ensor’s stock option measurement date	January 1,2021
2.)	Compensation expense for the stock option plan in 2021	$ 28.00	Millions	=21*4*1/3

3.)				$ Millions
	Date	Account Titles	Debit	Credit
	31. Dec.2022	Compensation Expense	22.40
		Additional Paid in Capital-Stock Option		22.40
		{ ( 21 - 2.1 ) x 4 x 2/3 } - 28
	31. Dec.2023	Compensation Expense	25.20
		Additional Paid in Capital-Stock Option		25.20
		{ ( 21 - 2.1 ) x 4 } - 28 - 22.40
4.)				$ Millions
	Date	Account Titles	Debit	Credit
	12 Jul ,2025	Cash ( 21 - 2.1 ) x (10 x 90% )	170.10
		Additional Paid in Capital-Stock Option	75.60
		( 28 + 22.40 + 25.20 )
		Common Stock ( 21 - 2.1 ) x 1		18.90
		Paid in Capital in excess of Par- Common Stock		226.80