Question

On January 1, Year 1, LL Company issued 100 stock options with an exercise price of $18 each to five employees (total 500 options). The options vest on December 31, Year 2, after the employees have completed two years of service. LL expects that all employees vest in the options.

Date Share Price Fair value of option

Jan. 1, Year 1 $21 $12

December 31, Year 1 $21 $13

December 31, year 2 $30 $15

Assume that this is the equity-settled share-based transaction. Please make all necessary journal entries from Jan. 1, Year 1 to December 31, Year2. Assume that this is the choice-of-settlement share-based transaction, in which the employees can choose to settle the options either (1) in shares of stock or (2) in cash. The option fair value of cash-settlement is equal to the fair value of equity-settlement.

Please make all necessary journal entries from Jan. 1, Year 1 to December 31, Year 2 if all employees choose the share settlement.

Answer 1

Answer- If all the employee choose the stock of shares,then jounal entry

Date	Particulars	Dr amount	Cr amount
Year 1 1 Jan	No entry
31 dec	Employee Compensation a/c	$4500
	To Employee stock option (W .Note 1)		$4500
	(Being expenses recoginzed)
31 dec	Profit and loss a/c	$4500
	To employee compensation		$4500
	( Being amount transfer to p&l A/c
year 2 31dec	Employee compensation a/c	$4500
	To Employee stock option A/c(W.note 2)		$4500
	(Being Expenses recognized)
	Profit and loss A/c	$4500
	To employee compensation		$4500
	(being expenses transfer to profit and losss)
	Bank a/c (500 shares8*$3 per share)	1500
	Employee stock option a/c	9000
	To equity sharecapital		5000
	To share premium		5500

Working note 1

Total expenses on issue option = Total shares* issue price

500 shares*$18 per share=$9000

Vesting period is 2 year so expenses should be recognized in year1= Total expenses/2

=$9000/2

=$4500

Working note 2

Expenses in the 2nd year would be recognized is $9000-$45000=$4500  

B) If Cash settlement opton is avail by shareholder then jpurnal entry

Date	Particulars	amount	amount
year2 31 dec	BAnk A/c(500 shares*$30per share)	$15000
	To Equity Share Capital a/c		$5000
	To Equity SharePremium		$10000
	(being share issued to employee on cash basis)