xercise 19-2 ock options; rfeiture of tions On January 1, 2016, MEM Corporation
ID: 2601699 • Letter: X
Question
xercise 19-2 ock options; rfeiture of tions On January 1, 2016, MEM Corporation granted 75,000 incentive stock options to branch managers, each permitting holders to purchase one share of the company's $1 par common shares within the next 7 years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $20 per share. The fair value of the options, estimated by an appropriate option pricing model, is $7 per option. Required: 1. Determine the total compensation cost pertaining to the options on January 1,2016. 019-2 xt: E 19-6 to record compensation expense on December 31, 3. Unexpected turnover during 2017 caused the forfeiture of 10% of the stock options. Determine 2016. the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2017. xercise 19-3 s: treasury ck; new shares; ck dividends o years The Reserve Company had 606 million shares of common stock outstanding at January 1, 2016. The following activities affected common shares during the year: There are no potential common shares outstanding 2016 Feb. 27 Purchased 18 million shares of treasury stock. 19-5 LO19-6 Oct. 30 Sold the treasury shares purchased on February 27. Nov. 29 Issued 72 million new shares. t: E 19-13 Dec. 31 Net income for 2016 is $1,200 million. 2017 Declared and issued a 2 for 1 stock split. Net income for 2017 is $1,200 million. Jan. 14 Dec. 31 Required: 1. Determine the 2016 EPS 2. Determine the 2017 EPS 3. At what amount will the 2016 EPS be presented in the 2017 comparative financial statementsExplanation / Answer
1. Calculation of total compensation cost to the company.
Compensation expense is equal to the fair market value of the options at the date og grant of options. In the given case fair value of options is $7 per option and the same is required to be recorded in books of the company over the vesting period of 5 years i.e. (1st Jan 2016 to 31st Dec 2020).
Compensation expense total = $7 x 75,000 = $525,000
Compensation expense to be booked in Dec 2016 = 525,000 / 5 = $105,000
2. Journal Entry for the compensation expense on 31st Dec 2016.
Date
Account
Debit
Credit
31 Dec 2016
Compensation Expense
TO Paid in capital for warranty stocks
(75,000 x 7) / 5 = 105,000
105,000
105,000
B. Calculation of Adjuted Compensation stock.
Total Stock options after forfeiture = 75,000 - 10% x 75,000 = 67,500
Adjusted Compensation cost = 67,500 x $7 per option = $472,500
Compensation cost to be booked till 2017 = $472,500 x 2 / 5 years = $189,000
Compensation cost to be booked for 2017 = Compensation cost till 2017 - Compensation cost already booked
= 189,000 - 105,000 = $84,000
Journal Entry
Date
Account
Debit
Credit
31 Dec 2017
Compensation Expense
TO Paid in capital for warranty stocks
[(67,500 x 7) x2 / 5 ]- 105,000 = 84,000
84,000
84,000
Date
Account
Debit
Credit
31 Dec 2016
Compensation Expense
TO Paid in capital for warranty stocks
(75,000 x 7) / 5 = 105,000
105,000
105,000
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