P16-4 (Stock-Based Compensation) Assume that Amazon.com has a stock-option plan
ID: 2418984 • Letter: P
Question
P16-4 (Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top manage-ment. Each stock option represents the right to purchase a share of Amazon $1 par value common stock inthe future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options = $40 Market price at grant date (January 1, 2014) = $40 Fair value of options at grant date (January 1, 2014) = $6 Service period = 5 years. Instructions (a) Prepare the journal entry(ies) for the first year of the stock-option plan. (b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2014. (c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b). (d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense? (1) Substantially all employees may participate. (2) The discount from market is small (less than 5%). (3) The plan offers no substantive option feature. (4) There is no preferred stock outstanding.
Explanation / Answer
a)
1/1/2014 No entry
12/31/2014 Dr. Compensation Expense ($6 X 5,000 ÷ 5) 6,000
Cr.Paid-in Capital—Stock Options 6,000
b)
1/1/2014 Dr. Unearned Compensation ($40 X 700) 28,000
Cr. Common Stock ($1 X 700) 700
Cr. Paid-in Capital in Excess of Par 27,300
12/31/2014 Dr. Compensation Expense ($28,000 ÷ 5) 5,600
Cr. Unearned Compensation 5,600
c)
No change for part (a), unless the fair value of the options change
For part (b)
1/10/2014 Dr.Unearned Compensation ($45 X 700) 31,500
Cr. Common Stock ($1 X 700) 700
Cr. Paid in Capital in Excess of Par 30,800
12/31/2014 Dr. Compensation Expense ($31,500 ÷ 5) 6,300
Cr. Unearned Compensation 6,300
d)
Numbers (1) substantially all employees may participate; (2) The discount from market is small (less than 5%); and (3) The plan offers no substantive option feature, are the three criteria that must be met for an employee stock-purchase plan to be non-compensatory. The fourth provision—there is no preferred stock outstanding—is irrelevant
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