Under its executive stock option plan, Jonas Corporation granted options on Janu

Question

Under its executive stock option plan, Jonas Corporation granted options on January 1, 2016, that permit executives to purchase 300,000 shares 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, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. 1. What total amount of compensation expense does Jonas Corporation expect to recognize with respect to these options? 2. What amount of compensation expense will be recognized in 2016 with respect jo these options? 3. Assume that all of the options are exercised on 1/1/2019 when the market price of the common stock is $25 per share. By how mu will equity change as a result of recording this transaction?

Explanation / Answer

1. total compensation expense expected to be recognised= fair value of option * number of options= 4 * 300000= 1200000

2. total expense will be recognised over vesting period, which is 2016-2018 = 3 years

per year expense will be prorated= 1200000/3= 400000

hence 400000 will be recognised as expense in 2016

3.

stock holders equity will be effected by the amount equal to the cash received= 300000*18= 5,400,000

entry will be:

balance is a movement with in equity accounts, hence no effect on stockholders equity as a whole

Account Debit Credit Working Cash 54,00,000.00 300000*18 Additional paid in capital - stock options 12,00,000.00 300000*4 Compensation expnese 9,00,000.00 balance Common stock 3,00,000.00 300000*1 Additional paid in capital 72,00,000.00 300000*24

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