Question

Mary Miller, Robert Riley, Charlie Carson, and Renee Regal are executives who work for Amsdahl Inc. On January 2, 2018, Amsdahl granted each executive incentive stock options to acquire 5,000 shares of Amsdahl $2 par value common stock at $18 per share. The options are exercisable beginning on January 2, 2021, and expire on December 31, 2022. The market value of Amsdahl common was equal to the exercise price on the grant date. Using an appropriate options pricing model, the fair value of one option on the grant date was $4.50. All four executives worked for Amsdahl during 2018. During 2019 and 2020, all executives continued working for the company except for Renee Regal, who resigned effective January 1, 2019. During 2020, Mary Miller and Charlie Carson exercised their options when the market value of Amsdahl common was $23 per share. During 2022, the market value of Amsdahl common fell to $16 per share, and Robert Riley let his options expire.

Make the journal entry to record compensation expense for 2018.

What is compensation expense for 2019?

What is compensation expense for 2020?

Make the journal entry to record the exercise of the stock options in 2021.

Make the journal entry to record the expiration of Robert Riley’s options in 2022.

Answer 1

Formula sheet

A	B	C	D	E	F
2
3		For stock options granted to employee, the compensation expense is recorded equally throghout the vesting period.
4		Vesting period is period between the dates when options are granted and date when individual is allowed to exercise the option.
5
6		Calculation of compensation expense for year 2018:
7
8		Number of employees	4
9		Number of options per employee	5000
10		Vesting period	3	year
11		Service Period Completed	1	year
12		Value of one option on grant date	4.5
13
14		Options expected to vest	=Number of Options per employee * Number of Employee
15			=D8*D9
16
17		Total stock option compensation	=Options expected to vest*Fair value of option at grant
18			=D15*D12
19
20		Cumulative expense at the end of year 2018	=Total stock option compensation*(Service Period completed / Vesting Period)
21			=D18*(D11/D10)
22
23		Previously recognized Expense	=0
24
25		Compensation expense for year 2018	=Cumulative Expense at the end of year 1 - Previously recognized expense
26			=D21-D23
27
28		Hence Compensation expense for year 2018	=D26
29
30		Journal Entry for the compensation expense on 31st Dec 2018 will be as follows:
31		Account	Debit	Credit
32		Compensation Expense	=D28
33		Additional paid-in capital – stock options		=D28
34
35
36		Calculation of compensation expense for year 2019:
37
38		Number of employees	3
39		Number of options per employee	5000
40		Vesting period	3	year
41		Service Period Completed	2	year
42		Value of one option on grant date	4.5
43
44		Options expected to vest	=Number of Options per employee * Number of Employee
45			=D38*D39
46
47		Total stock option compensation	=Options expected to vest*Fair value of option at grant
48			=D45*D42
49
50		Cumulative expense at the end of year 2019	=Total stock option compensation*(Service Period completed / Vesting Period)
51			=D48*(D41/D40)
52
53		Previously recognized Expense	=D28
54
55		Compensation expense for year 2019	=Cumulative Expense at the end of year 2 - Previously recognized expense
56			=D51-D53
57
58		Hence Compensation expense for year 2019	=D56
59
60
61		Calculation of compensation expense for year 2020:
62
63		Number of employees	3
64		Number of options per employee	5000
65		Vesting period	3	year
66		Service Period Completed	3	year
67		Value of one option on grant date	4.5
68
69		Options expected to vest	=Number of Options per employee * Number of Employee
70			=D63*D64
71
72		Total stock option compensation	=Options expected to vest*Fair value of option at grant
73			=D70*D67
74
75		Cumulative expense at the end of year 2020	=Total stock option compensation*(Service Period completed / Vesting Period)
76			=D73*(D66/D65)
77
78		Previously recognized Expense	=D58+D28
79
80		Compensation expense for year 2020	=Cumulative Expense at the end of year 3 - Previously recognized expense
81			=D76-D78
82
83		Hence Compensation expense for year 2020	=D81
84
85
86		Par Value of common stock	2
87		Option excercize price per share	18
88		Number of options excercized	=D9*2
89
90		Fair Value per option	=D12
91
92		Durin 2021, 10,000 options were excercized, cash will be received and stocks will be issued against it.
93		Also, the additional paid-in capital built up for that number of options during the vesting period is reversed.
94
95		Journal Entry for the exercise of option of May 1 2018 will be as follows:
96		Account	Debit	Credit
97		Cash	=D88*D87
98		Additional paid-in capital – stock options	=D88*D90
99		Common Stock ($2*10000)		=D88*D86
100		Additional paid-in capital		=D97+D98-E99
101
102		For the 5,000 options lapsed, journal entry is done on Dec 31 2018 to relabel the equity as expired stock options as follows:
103		Account	Debit	Credit
104		Additional paid-in capital – stock options ($4.5*5000)	=D90*5000
105		Additional paid-in capital – expired stock options		=D104
106