Question

Accounting for Dilutive securities and Earning per share.

On November 1, 2017, Larkspur Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s $10 par value common stock. The options were granted on January 2, 2018, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $30, and the fair value option-pricing model determines the total compensation expense to be $450,000.

All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was $69, and 10,000 on May 1 when the market price was $78 a share.

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performs services equally in 2018 and 2019.

Answer 1

Date	Accounts title and Explanation	Debit ($)	Credit ($)
01-02-2018	No Entry is required otherwise on exercise date
12/31/2018	Compensation Expense	2,25,000
	Paid-in Capital-Stock Options		2,25,000
	[To record compensation expense for 2018 (1/2 * $450,000)]
12/31/2019	Compensation Expense	2,25,000
	Paid-in Capital-Stock Options		2,25,000
	[To record compensation expense for 2019 (1/2 * $450,000)]
01-03-2020	Cash (20,000* $30)	6,00,000
	Paid-in Capital-Stock Options ($450000 * 20,000/30,000)	3,00,000
	Common Stock (20,000 * $10)		2,00,000
	Paid-in Capital in Excess of Par		7,00,000
	(To record issuance of 20,000 shares of $10 par value stock upon exercise of options at option price of $30)
05-01-2020	Cash (10,000 * $30)	3,00,000
	Paid-in Capital-Stock Options ($450,000 * 10,000/30,000)	1,50,000
	Common Stock (10,000 * $10)		1,00,000
	Paid-in Capital in Excess of Par		3,50,000
	(To record issuance of 10,000 shares of $10 par value stock upon exercise of options at option price of $30)