Question

In: Accounting

On January 1, 2018, Adams-Meneke Corporation granted 24 million incentive stock options to division managers, each...

On January 1, 2018, Adams-Meneke Corporation granted 24 million incentive stock options to division managers, each permitting holders to purchase one share of the company’s $1 par common shares within the next six years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $22 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Management’s policy is to estimate forfeitures. No forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options on January 1, 2018.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2018.
3. Unexpected turnover during 2019 caused an estimate of the forfeiture of 5% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2019 and 2020.

Solutions

Expert Solution

1) Total Compensation cost on January 1, 2018 = No. of Stock options*Fair Value of Option

= 24 million*$5 per option = $120 million vested over 3 years

2) Compensation Expense for 2018 = $120 million/3 yrs = $40 million   

Journal Entry (Amounts in $ million)

Date Account Titles and Explanations Debit Credit
Dec. 31, 2018 Compensation Expense 40
Paid in Capital-Restricted Stock 40
(To record compensation expense for 2018)

3) New Total Compensation = Old total compensation*Forefeiture rate

= $120 million*(1-5%)

= $120 million*95% = $114 million

Compensation cost for 2019 = (New total compensation*2/3) - Compensation cost for 2018

= ($114 million*2/3) - $40 million = $76 - $40 = $36 million

Compensation cost for 2020 = (New total compensation*3/3)-Compensation cost for 2018 and 2019

= ($114 million*3/3) - $40 million - $36 million

= $114 million - $40 million - $36 million = $38 million

  Journal Entry (Amounts in $ million)

Date Account Titles and Explanations Debit Credit
Dec. 31, 2019 Compensation Expense 36
Paid in Capital-Restricted Stock 36
(To record compensation expense for 2019)
Dec. 31, 2020 Compensation Expense 38
Paid in Capital-Restricted Stock 38
(To record compensation expense for 2020)

  

ekkarill92 answered 1 year ago
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