Question

Walters Audio Visual, Inc. offers a stock option plan to its regional managers. On January 1, 2018, 45 million options were granted for 45 million $1 par common shares. The exercise price is the market price on the grant date, $10 per share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. Because the plan does not qualify as an incentive plan, Walters will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The income tax rate is 40%.
  
Required:
1. Determine the total compensation cost pertaining to the stock option plan.
2. to 4. Assume all of the options are exercised on March 20, 2023, when the market price is $14 per share. Prepare the necessary journal entries.
5. & 6. Assume the option plan qualifies as an incentive plan if all of the options are exercised on March 20, 2023, when the market price is $13 per share. Prepare the necessary journal entries.

Answer 1

REQUIREMENT 1..... ( $ IN MILLION, except '' per option '' amounts)

WALTERS AUDIO VISUAL, INC.

At January 1, 2018, the estimated value of the award is
Estimated fair value per option	$ 2
Options granted	45
Total compensation	$ 90

WALTERS AUDIO VISUAL, INC.

General Journal ($ in millions)

Account Debit Credit REQUIREMENT 2 to 4 : Compensation expense 45    Paid in capital - stock options 45 Deferred tax asset 18    Tax expenses (45 * 40%) 18 Cash ($10 exercise price * 45 million shares) 450 Paid in capital - stock options 90    Common stock (45 million shares at $1 par per share) 45     Paid in capital - excess of par 495 Income taxes payable 72    Deferred tax asset (90 * 40%) 36    Paid in capital - tax effect of stock options 36 REQUIREMENT 5 & 6 : Cash 450 Paid in capital - stock option 90    Common stock (45 million shares at $1 par per share) 45    Paid in capital - excess of par 495 No deferred tax asset is recorded because an incentive plan does not provide the employer a tax deduction.