Question

Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2018, options were granted for 24 million $1 par common shares. The exercise price is the market price on the grant date—$7 per share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair value of the 24 million options, estimated by an appropriate option pricing model, is $1 per option. Required: 1. Determine the total compensation cost pertaining to the incentive stock option plan. 2. to 5. Prepare the appropriate journal entries to record compensation expense on December 31, 2018 and 2019. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2020, when the market price is $8 per share and the entry on December 31, 2024, when the remaining options that have vested expire.

Answer 1

1
Total compensation expense = Options granted*Estimated fair value per option
Total compensation expense	24*1
Total compensation expense	$24	million
The total compensation expense is $24 million.
2
Journal entry to record compensation expense in 2018
Date	General Journal	Debit	Credit
31-Dec-18	Compensation expense (24/2)	$12
	Paid in capital - stock options		$12
	(To record compensation expense)
Explanation: Compensation expense is an expense and so it is debited and corresponding equity is created in the equity section and so paid in capital - stock options is credited.
3
Journal entry to record compensation expense in 2019
Date	General Journal	Debit	Credit
31-Dec-19	Compensation expense ((24*(2/2))-12)	$12
	Paid in capital - stock options		$12
	(To record compensation expense)
Explanation: Compensation expense is an expense and so it is debited and corresponding equity is created in the equity section and so paid in capital - stock options is credited.
4
Journal entry to record exercise of 75% of stock options
Date	General Journal	Debit	Credit
12-Mar-20	Cash (24*75%*7)	126
	Paid in capital - stock options (24*75%)	18
	Common stock (24*75%*1)		18
	Paid in capital - excess of par (Balance)		126
	(To record exercise of 75% of stock option)
Explanation: Cash would be received on common stock issue and so cash is debited, the compensation expense recognized in the equity for 75% would be reversed and so it is debited.
New common shares would be issued and so would be credited. The shares issued are above the par value and so paid in capital would be credited for balance.
5
Journal entry to record options that expired without vesting
Date	General Journal	Debit	Credit
31-Dec-24	Paid in capital - stock options (24*25%*1)	$6
	Paid in capital - expiration of stock options		$6
Explanation: The compensation expense recognize in equity will be reversed and so paid in capital stock options would be debited.
The paid in capital would be credited for expiration of stock options