Question

In: Accounting

At January 1, Year 1, AMC Company grants 10,000 options that permit key executives to acquire...

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.

Solutions

Expert Solution

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

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