10-38 Exercise of Stock Options On January 1, 2013, Lyndon Systems granted its t
ID: 2471348 • Letter: 1
Question
10-38 Exercise of Stock Options
On January 1, 2013, Lyndon Systems granted its top executives options to purchase 6,000 shares of common stock (par $2) at an exercise price of $20 per share, the market price on January 1. The options have an estimated fair value of $8 per option and may be exercised over a 4-year span, starting 3 years hence. Suppose all options are exercised 3 years hence, when the market value of the stock is $45 per share.
1. Prepare the journal entries Lyndon would record to account for compensation expense on December 31, 2013, December 31, 2014, and December 31, 2015.
2. Prepare the appropriate journal entry for the exercise of the options on the books of Lyndon Systems.
Explanation / Answer
Fair value of the option is $8 per option
As 3 years are the vesting period so the expense shall be booked in first 3 years at the fair value of $8
total compensation expense = 6,000 * $8 = $48,000
Compensation expense on 31st december 2013 = 48,000 * 1 / 3 = $16,000
Compensation expense on 31st december 2014 = (48,000 *2/3 ) - 16,000 = $16,000
Compensation expense on 31st december 2015 = (48,000 * 3/3) - 32,000 = $16,000
2. exercise price = $20 per shares so total amount of cash in = $20 * 6,000 = $120,000
Cash $120,000
Additional paid in capital stock option $48,000
Compensation expense $102,000
Common stock $12,000 ( $2 * 6,000)
Paid in capital in excess $258,000 ( $43 * 6,000)
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