On January 1, 2012, Legoria Co. grants options that permit key executives to acq

Question

On January 1, 2012, Legoria Co. grants options that permit key executives to acquire 10 million of the company’s $1 par common stock within the next eight years, but not before December 31, 2015 [the vesting date]. The exercise price is the market price of the shares on the date of the grant, $35 per share. The fair value of the options, estimated by an appropriate option pricing model, is $8 per option.


1. Prepare the journal entry at the Grant Date, 1/1/2012.
2. Prepare the journal entries that would be recorded over the service period by Legoria Co.
3. On July 11, 2016, 8 million of the options are exercised when the market price of Legoria Co’s stock is $50 per share. Prepare the journal entry for the exercise of these options.
4. On January 1, 2020, 2 million options expired. Prepare the entry for the 2 million options that expired without being exercised.

Explanation / Answer

The total compensation is allocated to expense over the 4-year service (vesting) period: 2012 - 2015 $80 million ÷ 4 years = $20 million per year December 31, 2011, 2012, 2013, 2014($ in millions) Compensation expense ($80 million ÷ 4 years)-- 20 Paid-in capital – stock options-----------------------20 If a forfeiture rate of 5% was expected, annual compensation expense would have been $19 million ($76 / 4) instead of $20 million. During 2014, the third year, Universal revises its estimate of forfeitures from 5% to 10%. The new estimate of total compensation would then be $80 million x 90%, or $72 million. The expense each year is the current estimate of total compensation that should have been recorded to date less the amount already recorded. 3rd Year = $16M = ($80 million x 90% x ¾) – [$19 + 19]) 4th Year = $18M = ([$80 million x 90% x 4/4] – [$19 + 19 + 16]) ESTIMATED FORFEITURES 2012($ in millions) Compensation expense ($80 x 95% x 1/4) ------------------19 Paid-in capital –stock options--------------------------------------19 2013 Compensation expense ($80 x 95% x 1/4)-------------------19 Paid-in capital –stock options--------------------------------------19 2014 Compensation expense ([$80 x 90% x ¾] – [$19 + 19])-------16 Paid-in capital –stock options---------------------------------------16 2015 Compensation expense ([$80 x 90% x 4/4] – [$19 + 19 + 16])----18 Paid-in capital –stock options------------------------------------------18 If half the options (eight million shares) are exercised on July 11, 2015, when the market price is $50 per share, the following journal entry is made: July 11, 2015 ($ in millions) Cash ($35 exercise price x 8 million shares ) ---------------280 Paid-in capital - stock options ----------------------------------72 Common stock (8 million shares at $1 par per share)-------------- 8 Paid-in capital – excess of par (to balance)------------------------346 WHEN VESTED OPTIONS EXPIRE WITHOUT BEING EXERCISED If options that have vested expire without being exercised, the following journal entry is made (assuming none of the options were exercised): ($ in millions) Paid-in capital – stock options (account balance) -- 80 Paid-in capital – expiration of stock options----------80

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.