Question

on january 1, 2021, adams-meneke corporation granted 15 million incentive stock options to division managers, each permitting holders to purchase one share of the company’s $1 par common shares within the next six years, but not before december 31, 2023 (the vesting date). the exercise price is the market price of the shares on the date of grant, currently $52 per share. the fair value of the options, estimated by an appropriate option pricing model, is $4 per option. management’s policy is to estimate forfeitures. no forfeitures are anticipated. ignore taxes.

Answer 1

Compensation expense for the stock option plan in 2021, 2022, 2023 are $210 millions, $96 million, $108 million.

Options granted 120 Millions

Multiply: Estimated fair value per option is $ 3

Total Compensation Expense is $ 360 Millions

Divided by: No. of years in vesting period (2021,2022 & 2023) 3 Years

Compensation expense for the stock option plan in 2021. is $ 120 Millions

•                     Amounts are expressed in millions $.

Date                   General journal                     debit             Credit

31st Dec, 2021 Compensation expense            $ 120

                     Paid in capital – stock options                     $ 120

• Percentage of option forfeited (100%-10%) = 90%

• Cumulative Compensation expense Up to Year 2022 (360*90%*2/3) = $ 216

Less: recognized in earlier year is $ 120

Compensation expense For Year 2022 is $ 96

Cumulative Compensation expense Up to Year 2023 (360*90%*3/3)  

                                                                                          = $ 324

Less: recognized in earlier year is $ 216

Compensation expense For Year 2023 is $ 108

•                        Amounts are expressed in millions $.

Date                     General journal                   debit           Credit

31st Dec, 2023 Compensation expense           $ 96  

                      Paid in capital – stock options                    $ 96

     

31st Dec, 2023 Compensation expense    $ 108  

                      Paid in capital – stock options                   $ 108

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