Question

3. On January 1, 2015 Carter Company granted a total of 10,000 stock options to 10 company officers. Each option can be used to purchase one share of the company’s $1 par value common stock at $20 per share. The options are additional compensation for work to be performed over the next two years.   They are exercisable during a 5-year period beginning on January 1, 2017. The Magic option-pricing model determines total compensation expense related to these options to be $90,000. The market price of the common stock was $21 per share at the date of grant.

At December 31, 2021, eight of the executives exercised their options and the remaining two chose to forfeit them. At that date, the market price of the common stock was $35 per share.

Record the journal entries required on January 1, 2015, December 31, 2015, December 31, 2016, and on December 31, 2021. (8 points)

Answer 1

	In the books of Carter
	Journal Entries
Date	Particulars	Debit	Credit
01-12-15	On the date of grant no entry will be made
31-12-15	Employees compensation expense account	$    50,000.00
	To Employee stock option outstanding account		$    50,000.00
	(Being compensation expenses recognized in respect of the 10,000 employee stock options for 10 employees for 2 year at fair value of 21-20 i.e.1)
31-12-15	Profit and loss account	$    50,000.00
	To Employees compensation expenses account		$    50,000.00
	(Being expenses transferred to profit and loss account at the year end)
31-12-16	Employees compensation expense account	$    50,000.00
	To Employee stock option outstanding account		$    50,000.00
	(Being compensation expenses recognized in respect of the 10,000 employee stock options for 10 employees for 2 year at fair value of 21-20 i.e.1)
31-12-16	Profit and loss account	$    50,000.00
	To Employees compensation expenses account		$    50,000.00
	(Being expenses transferred to profit and loss account at the year end)
31-12-21	Employee stock option outstanding account	$    10,000.00
	To General Reserve		$    10,000.00
	(Being ESOP lapsed for 2 employees)
31-12-21	Bank A/C	$    1,600,000
	Employee stock option outstanding account	$         90,000
	To Equity Share capital@$1(10000 option*8 employee)		80000
	To Security premium(10000 option*8 employee*$19)		$    1,610,000
	(Being options exercised)

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