In: Accounting
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 a journal entry:
Record the options that expire as unexercised at its fair value.
This is a question of Share based payments- Employee Stock Options
a. No. of options to employees= 10,000 options
b. Exercise price(EP) on grant date= $20 per share
c. Fair value(FV) of options at grant date= $4 per option
d. Vesting date= 31st December, Year 3 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 | Particulars | 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 |