On January 1, 2008, PWC awarded stock options to two of its top managers, Price
ID: 2644999 • Letter: O
Question
On January 1, 2008, PWC awarded stock options to two of its top managers, Price and Waterhouse. Price received options to purchase 25,000 shares of PWC $1 par common stock at an exercise price of $10/share. Waterhouse received 15,000 options to purchase DH $1 par common stock at that same exercise price.
An option pricing model is employed to estimate the fair value of the award on the grant date. Each option is valued at $20. The options are first exercisable on January 1, 2012 and expire on December 31, 2013.
On April 18, 2010, Waterhouse accepts an offer from KPMG, Inc. and leaves the company.
On July 29, 2012, Price exercises all her options at a time when DH common sells for $39/share.
PWC is a calendar-year firm and has adopted the fair value approach to measuring compensation expense for all stock-based compensation programs.
Required
Use the space below for calculations. On the next page, prepare journal entries to account for this activity.
Explanation / Answer
Total Compensation = (25000+15000)*20 Total Compensation = 800000 Compensation is allocated over 4 years of service period 2008 to 2011 so, 800000/4 = $ 200000 per year Journal Entries in the books of PWC Date Particulars Amount Dr Amount Cr 31-Dec-08 Compensation Exp A/c Dr. 200000 To Paid in Capital Stock options 200000 (Being employee compensation through ESOP recognised) 31-Dec-09 Compensation Exp A/c Dr. 200000 To Paid in Capital Stock options 200000 (Being employee compensation through ESOP recognised) 18-Apr-10 Paid in Capital Stock option A/c Dr 150000 To Compensation A/c 150000 (Being ESOP reversed as Waterhouse quit job) 31-Dec-10 Compensation Exp A/c Dr. 125000 To Paid in Capital Stock options 125000 (Being employee compensation through ESOP recognised) 31-Dec-11 Compensation Exp A/c Dr. 125000 To Paid in Capital Stock options 125000 (Being employee compensation through ESOP recognised) 29-Jul-12 Cash A/c Dr 250000 Paid in Capital Stock Options A/c Dr 500000 To Equity Share Capital A/c 25000 To Equity Share Premium A/c 725000 (Being ESOP exercised by Price)
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