Question

On October 15, 2017, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2018, 38 million stock options were granted, exercisable for 38 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2021, and December 31, 2023, at 80% of the quoted market price on January 1, 2018, which was $10. The fair value of the 38 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 (3.8 million) of the options were forfeited when an executive resigned in 2019. All other options were exercised on July 12, 2022, when the stock’s price jumped unexpectedly to $36 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2018. (Ignore taxes.)
3. & 5. Prepare the necessary journal entries.

Answer 1

1. When is Ensor’s stock option measurement date?

The date of grant is the Ensor’s stock option measurement date. I.e. On January 1, 2018, 38 million stock options were granted.

2. Determine the compensation expense for the stock option plan in 2018. (Ignore taxes.)

Fair value of option x Option granted

= $3 x 38 = $114 Million

The total compensation to be allocated to expese is $38 million per year.

Prepare the necessary journal entries

3.8 forfeited, So 3.8/38*100% = 10%

Therefore, unforfeited is 90%

2019	Debit	Credit
Compensation expenses ($114*90%*2/3)-$38	30.4
Paid in capital - Stock option		30.4

2020	Debit	Credit
Compensation expenses ($114*90%*3/3)-$38-30.4	34.2
Paid in capital - Stock option		34.2

2022	Debit	Credit
Cash	273.2
Paid in capital - Stock option	102.6
Common stock		34.2
Paid in capital - excess of par		341.6

Cash = 10*80% = $8*34.2 million shares = $273.2million

Common stock = 34.2 million shares at $1 per share = $34.2