Walters Audio Visual, Inc., offers a stock option plan to its regional managers.
ID: 2571900 • Letter: W
Question
Walters Audio Visual, Inc., offers a stock option plan to its regional managers. On January 1, 2016, options were granted for 40 million $1 par common shares. The exercise price is the market price on the grant date, $9 per share. Options cannot be exercised prior to January 1, 2018, and expire December 31, 2022. The fair value of the options, estimated by an appropriate option pricing model, is $3 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%.
Prepare the necessary journal entries.
-Record compensation expense on December 31, 2016.
-Record any tax effect related to compensation expense recorded in 2016.
-Record compensation expense on December 31, 2017.
-Record any tax effect related to compensation expense recorded in 2017.
-Record the exercise of the options on March 20, 2021 when the market price is $13 per share.
-Record any tax effect related to the exercise of the options.
Walters Audio Visual, Inc., offers a stock option plan to its regional managers. On January 1, 2016, options were granted for 40 million $1 par common shares. The exercise price is the market price on the grant date, $9 per share. Options cannot be exercised prior to January 1, 2018, and expire December 31, 2022. The fair value of the options, estimated by an appropriate option pricing model, is $3 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%.
Prepare the necessary journal entries.
-Record compensation expense on December 31, 2016.
-Record any tax effect related to compensation expense recorded in 2016.
-Record compensation expense on December 31, 2017.
-Record any tax effect related to compensation expense recorded in 2017.
-Record the exercise of the options on March 20, 2021 when the market price is $13 per share.
-Record any tax effect related to the exercise of the options.
No Date General Journal Debit Credit December 31, 2016 Compensation expense 60 Paid-in capital-stock option:s 60 December 31 2016 2 Deferred tax asset Income tax expense 16 December 31, 2017 3 Compensation expense 60 Paid-in capital-stock option:s 60 December 31 2017 4 Deferred tax asset Income tax expense 16 December 31, 2021 Cash 360 Paid-in capital-stock option:s 80 Common stock 40 Paid-in capital-excess of par 400 December 31 2021 6 Income taxes payable 64 Deferred tax asset 32 Paid-in capital-tax effect of stock options 32Explanation / Answer
Accounts Title Dr Cr 1 Dec 31 2016 Compensatin expense (40*3)/2 $60 Paid in capital-Stock Options $60 2 Dec 31 2016 Deferred Tax Asset Income Tax expense $24.0 (60*40%) $24.0 3 Dec 31 2016 Compensatin expense (40*3)/2 $60 Paid in capital-Stock Options $60 Dec 31 2016 Deferred Tax Asset 4 Income Tax expense $24.0 (60*40%) $24.0 5 Dec 41 2021 Cash (40*9) 360 Paid in capital-Stock Options 120 Common stock 40 Paid In capital excess of par 440 6 Dec 31 20121 Income tax payable 64 Deferred Tax asset 48 Paid in capital -tax effect of stock options 12
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