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

Question

Under its executive stock option plan, National Corporation granted options on January 1, 2016, 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, 2018 (the vesting date). The exercise price is the market price of the shares on the date of grant, $31 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose that the options expire without being exercised.

Ignoring taxes, what journal entry will National record?

Under its executive stock option plan, National Corporation granted options on January 1, 2016, 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, 2018 (the vesting date). The exercise price is the market price of the shares on the date of grant, $31 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. Suppose that the options expire without being exercised.

Explanation / Answer

Compensation Expenses = 30 Million options X $4 (Fair Value per Option) Compensation Expenses = $120 Millions Journal Entry (Amt in Millions) Date Particulars Dr. Amt Cr. Amt 31-Dec Compensation Expenses                             Dr. 40 $120 Millions / 3 2016 - 2018    To Paid-in-Capital Stock Options 40

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