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Under its executive stock option plan, National Corporation granted options on J

ID: 2483471 • Letter: U

Question

Under its executive stock option plan, National Corporation granted options on January 1, 2013, that permit executives to purchase 30 million of the company’s $1 par common shares 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 grant, $30 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. Suppose that the options are exercised on April 3, 2016, when the market price is $34 per share.Ignoring taxes, what journal entry will National record?


Record entry for options exercised on April 3, 2016, when the market price is $34 per share.

Explanation / Answer

The options will be exercised when the fair value of shares that will be obtained exceeds the exercise price of the options. The compensation received by the employee will be equal to this excess. This excess is equal to the intrinsic value of the options on the exercise date. On the assumption that the fair value of services rendered is equal to the fair value of compensation received, compensation expense should be measured by the intrinsic value of the options on the exercise date.

30 million shares are divided into 8 years which comes to 12.5% of each year provision.

Journal Entry as on date dec 31 2014

Journal Entry as on date dec 31 2015

Journal Entry as on date April 3, 2016

Journal Entry as on date dec 31 2014

Compensation Expenses 7500000       Paid in Capital-stock options 7500000 ($32-$30)*30000000*(12.5%) = 7500000 (Provision for 1st year)

Journal Entry as on date dec 31 2015

Compensation Expenses 22500000       Paid in Capital-stock options 22500000 ($34-$30)*30000000*(25%) = 30000000 - (1st year provision 7500000)

Journal Entry as on date April 3, 2016

Compensation Expenses 90000000       Paid in Capital-stock options 90000000 ($34-$30)*30000000*100% = 120000000 - (7500000 (1st year provision)+22500000 (2nd year provision)) = 90000000