Walls Drugs offered an incentive stock option plan to its employees. On January
ID: 2479288 • Letter: W
Question
Walls Drugs offered an incentive stock option plan to its employees. On January 1, 2016 options were granted for $84,000 $1 par common shares. The exercise price equal the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2019, and expire December 31, 2020. Each option has a fair value of $1 based on an option pricing model. Which is the correct entry to record compensation exepense for the year 2016?
A.) Compensation expense:16,800; Paid in capital-stock options 16,800
B.) Compensation expense:28,000, Paid in capital-stock options 28,000
C.) Compensation expense:28,000, Common Stock 28,000
D.) Compensation expense; 112,000; Paid capital-stock options 112,000
Please show work
Explanation / Answer
Solution:
Correct Answer is B.) Compensation expense:28,000, Paid in capital-stock options 28,000
Stock Option expenses are recognised over the vesting period of option at fair value of stock option.
Vesting Period = 3 years (2016 - 2019)
Fair Value of Option = $1
Total options = 84,000
Stock Option Comensation Expenses for 2016 = total option x fair value x 1/3 = 84,000 x $1 x 1/3 = $28,000
the following entry is to be passed to record compensation expenses in year 2016
Comensatoin Expenses Dr. $28,000
To Paid in Capital Stock Option $28,000
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