At January 1, Year 1, AMC Company grants 10,000 options that permit key executiv

Question

At January 1, Year 1, AMC Company grants 10,000 options that permit key executives to acquire 10,000 of the company’s $1 par common shares within the next five years, but not before December 31, Year 3 (the vesting date). The exercise price is the market price of the shares on the date of grant, $20 per share. The fair value of the options is $4 per option. Eighty percent of the options (or 8,000) are exercised on January 5, Year 4 when the market price is $30 per share. The remaining 20% of the options expire as unexercised when the market price is $18 per share. Prepare the appropriate journal entry for the expiration of the unexercised options.

Record Journal entry

Record the options that expire as unexercised at its fair value.

Explanation / Answer

Date Account Title Debit Credit Dec.31, year1 Stock option compensation expense 66667 APIC - Stock options 66667 (Compensation cost of 10,000 stock options for year 1) Dec.31, year 2 Stock option compensation expense 66667 APIC - Stock options 66667 (Compensation cost of 10,000 stock options for year 2) Dec.31, year 3 Stock option compensation expense 66666 APIC - Stock options 66666 (Compensation cost of 10,000 stock options for year 3) Jan.5, year 4 APIC - Stock options 160000 Common stock 8000 APIC - Common Stock 152000 (Exercise of stock options for 8,000 shares) Dec.31, year4 APIC - Stock options 40000 Employee compensation epense 40000 (Expriy of 2,000 stock options) Total number of stock options 10000 Exercise price for the options 20 Total value of the stock option compensation 200000 Vesting period 3 years Stock option compensation per annum 66667

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