Walters Audio Visual, Inc. offers a stock option plan to its regional managers.

Question

Walters Audio Visual, Inc. offers a stock option plan to its regional managers. On January 1, 2018, 45 million options were granted for 45 million $1 par common shares. The exercise price is the market price on the grant date, $10 per share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. Because the plan does not qualify as an incentive plan, Walters will receive a tax deduction upon exercise of the options equal to the excess of the market price at exercise over the exercise price. The income tax rate is 40%.
  
Required:
1. Determine the total compensation cost pertaining to the stock option plan.
2. to 4. Assume all of the options are exercised on March 20, 2023, when the market price is $14 per share. Prepare the necessary journal entries.
5. & 6. Assume the option plan qualifies as an incentive plan if all of the options are exercised on March 20, 2023, when the market price is $13 per share. Prepare the necessary journal entries.

Explanation / Answer

REQUIREMENT 1..... ( $ IN MILLION, except '' per option '' amounts)

WALTERS AUDIO VISUAL, INC.

General Journal ($ in millions)

WALTERS AUDIO VISUAL, INC. At January 1, 2018, the estimated value of the award is Estimated fair value per option $ 2 Options granted    45 Total compensation $ 90

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