Question

At January 1, Year 1, AMC Company grants 10,000 options that permit key executives to acquire 10,000 of the company’s $1 par common shares within the next five years, but not before December 31, Year 3 (the vesting date). The exercise price is the market price of the shares on the date of grant, $20 per share. The fair value of the options is $4 per option. Eighty percent of the options (or 8,000) are exercised on January 5, Year 4 when the market price is $30 per share. The remaining 20% of the options expire as unexercised when the market price is $18 per share. Prepare the appropriate journal entry for the expiration of the unexercised options.

Record the options that expire as unexercised at its fair value

Answer 1

Ans:

This is a question of Share based payment- Employee Stock Options

a. N.of option to employees= 10,000 option

b. Exercise price(EP) on grant date= $20 per share

c. Fair value(FV) of option at grant date= $4 per option

d. Vesting date= 31st Dec, 3 Year thus Vesting period= 3 Years

e. Par value per share= $1

Option Expense

Option expense to be recognised= {(Fair Value of option on grant date*No. of options expected to vest*period expired) / Total Vesting period} - (option expense recognised in previous years)

Option expense at Year end 1= (4*10,000*1)/3 - 0 = $13,333

Option expense at Year end 2= (4*10,000*2)/3 - 13,333 = $13,333

Option expense at Year end 3= (4*10,000*3)/3 - 26,666 = $13,334

Journal Entries:

Date	Particular	Debit Amount	Credit Amount
Jan 1, Year 1	No entry as on grant date
Dec 31, Year 1	Employee Compensation --- Dr. To Employee Stock Option	13,333	13,333
Dec 31, Year 1	Profit and loss -----------------Dr. To Employee Compensation	13,333	13,333
Dec 31, Year 2	Employee Compensation --- Dr. To Employee Stock Option	13,333	13,333
Dec 31, Year 2	Profit and loss -----------------Dr. To Employee Compensation	13,333	13,333
Dec 31, Year 3	Employee Compensation --- Dr. To Employee Stock Option	13,334	13,334
Dec 31, Year 3	Profit and loss -----------------Dr. To Employee Compensation	13,334	13,334
Jan 5, Year 4	Bank ----------------------------Dr. To Employee Stock option (8,000 options*20 exercise price)	160,000	160,000
Jan 5, Year 4	Employee Stock Option------Dr. To Equity Share Capital (8,000 shares *1 par value)	8,000	8,000
Jan 5, Year 4	Employee Stock Option-----Dr. To Security Premium (8,000 shares*(20 EP+4 FV- 1par)	184,000	184,000
Dec 31, Year 5	Employee Stock option------Dr. To General Reserve (2,000 options lapsed*4 per option FV)	8,000	8,000