Question

In: Accounting

Please answer the following question, Vanstone Corp., a public company, adopted a stock option plan on...

Please answer the following question,

Vanstone Corp., a public company, adopted a stock option plan on November 30, 2017, that designated 70,000 common shares as available for the granting of options to officers of the corporation at an exercise price of $8 a share. The market value was $12 a share on November 30, 2017.

On January 2, 2018, options to purchase 28,000 shares were granted to President Don Pedro: 15,000 for services to be rendered in 2018, and 13,000 for services to be rendered in 2019. Also on that date, options to purchase 14,000 shares were granted to Vice-President Beatrice Leonato: 7,000 for services to be rendered in 2018, and 7,000 for services to be rendered in 2019. The shares' market value was $14 a share on January 2, 2018. The options were exercisable for a period of one year following the year in which the services were rendered. On January 2, 2018, the value of the options was estimated at $400,000.

In 2019, neither the president nor the vice-president exercised their options because the shares' market price was below the exercise price. The shares' market value was $7 a share on December 31, 2019, when the options for 2018 services lapsed.

On December 31, 2020, both the president and vice-president exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share. The company's year-end is December 31.

Instructions

1) Prepare the necessary journal entries in 2017 when the stock option plan was adopted, in 2018 when the options were granted, in 2019 when the options lapsed, and in 2020 when the options were exercised.

Solutions

Expert Solution

Date

General Journal

Debit ($)

Credit ($)

30 November 2017

No Entry

There will not be any journal entry for the adoption of employee stock options

02 January 2018

No Entry

There will not be any journal entry for the grant of options on date of grant

31 December 2018

Compensation Expense A/c                           Dr

125,714

       To Paid in Capital - Stock Options A/c

125,714

Being Recognition of employee compensation expense.
($ 400,000/70,000 Options)*22,000 options

31 December 2019

Compensation Expense A/c                           Dr

114,286

       To Paid in Capital - Stock Options A/c

114,286

Being Recognition of employee compensation expense.
($ 400,000/70,000 Options)*20,000 options

31 December 2019

Paid in Capital - Stock Options A/c               Dr

125,714

       To Paid in capital from Expired stock options A/c

125,714

Being lapse of Employee stock options for the services rendered in the year 2018

31 December 2020

Cash A/c                                             (20,000*$8)               Dr

160,000

Paid in Capital - Stock Options A/c                                     Dr

114,286

        To Common Stock A/c

274,286

Being Employee stock options Exercised

Question was silent regarding Par value of the share. Therefore, entire amount was credited to Common stock account. Alternatively, We can also make an assumption that the par value of the share is $ 5 and entry will be as follows:

31 December 2020

Cash A/c                                         (20,000*$8)                   Dr

160,000

Paid in Capital - Stock Options A/c                                    Dr

114,286

        To Common Stock A/c            (20,000*$ 5)

100,000

        To Additional Paid In capital over par value A/c

174,286

Being Employee stock options Exercised


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