Question

Olde Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2021, that permit executives to acquire 2 million of the company's $1 par value common shares within the next five years, but not before December 31, 2022 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are anticipated. Ignore taxes. Required: 1. Determine the total compensation cost pertaining to the options, assuming the fair value approach has been selected. 2. To 4. Prepare the appropriate journal entries

Answer 1

Based on the characteristics of the plan given by Olde Corporation, the total compensation cost is $4 million.

The journal entries will be:

Date                  Account title                                       Debit               Credit

Dec 31, 2021     Compensation expense                     2,000,000

                          Paid-In Capital - Stock options                         2,000,000

Date                  Account title                                       Debit               Credit

Dec 31, 2022     Compensation expense                     2,000,000

                          Paid-In Capital - Stock options                          2,000,000

Date                  Account title                                         Debit             Credit

April 31, 2021   Cash                                                  28,000,000

                          Paid-In Capital - Stock options        4,000,000

                          Common stock                                                  2,000,000

                          Paid In Capital in excess of Par                      30,000,000

What is the total compensation cost?

This can be found as:

= Options granted x Fair value of options

= 2 million x 2

= $4 million

Cash is:

= Market price per share x Number of shares

= 14 x 2

= $28 million

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