On January 1, 2017, Waterway Corporation granted 4,500 options to executives. Ea

Question

On January 1, 2017, Waterway Corporation granted 4,500 options to executives. Each option entitles the holder to purchase one share of Waterway's $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $62 per share on the date of grant. The fair value of the options at the grant date is $157,000 The period of benefit is 2 years Prepare Waterway's journal entries for January 1, 2017, and December 31, 2017 and 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit

Explanation / Answer

Option granted = 4500

Par Value = $5 per stock

Purchase Price = $50 per stock

Vested Period = 2 Years

Exercise Period = 5 Years

Market Price = $62

Fair value of option = $157000

we have to wright the fair value of option in two equal instalments to record the compensation and after this one entry for exercised option at the end as below

Working

1. Cash Received = 4500 x 50 = $225000

2. Additional paid in capital stock option credit balance = $78500 + $78500 = $157000

3. Common Stock (for par value) = 4500 x 5 = $22500

4. Additional paid in capital Common Stock (Balancing Figure) = (225000+ 157000) - 22500 = $359500

Entry for 12/31/18 can also be devided in two entries for equal half amounts assuming that stock exercised for two times we have journalise this in one go. So this can be in that way also. in this method 4 entry instead of four will be done but due to nature question we have journalize in three entries.

Date Accounts Debit Credit 01/01/2017 Compensation Expenses 78500 Additional paid in capital stock option 78500 (compensation expenses recorded) 12/31/2017 Compensation Expenses 78500 Additional paid in capital stock option 78500 (compensation expenses recorded) 12/31/2018 Cash 225000 Additional paid in capital stock option 157000 Common Stock 22500 Additional paid in capital Common Stock 359500 (all stock options exercised)

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