Answer:
a.
1/1/2014 No entry
12/31/2014
Dr Compensation Expense $6,000
Cr Paid-in Capital—Stock Options $6,000
b. 1/1/2014
Dr Unearned Compensation $28,000
Cr Common Stock $700
Cr Paid-in Capital in Excess of Par $27,300
12/31/2014
Dr Compensation Expense $5,600
Cr Unearned Compensation $5,600
c. No change for Part A
Part B
1/1/2014
Dr Unearned Compensation $31,500
Cr Common Stock $700
Cr Paid-in Capital in Excess of Par $30,800
12/31/2014
Dr Compensation Expense $6,300
Cr Unearned Compensation $6,300
d. 0ptions 1,2&3
1.Substantially all the employees may participate
2. Discount from the market is small (less than 5%)
3. The plan tend to offers no substantive option feature.
Explanation:
a.Preparation of the journal entry(ies) for the first year of the stock-option plan.
1/1/2014 No entry
12/31/2014
Dr Compensation Expense $6,000
($6 * 5,000 ÷ 5)
Cr Paid-in Capital—Stock Options $6,000
b. Preparation of the journal entry(ies) for the first year of the plan
1/1/2014
Dr Unearned Compensation $28,000
($40 * $700)
Cr Common Stock $700
($1 * 700)
Cr Paid-in Capital in Excess of Par $27,300
($28,000-$700)
12/31/2014
Dr Compensation Expense $5,600
($28,000 ÷ 5)
Cr Unearned Compensation $5,600
c.
a. In a situation where we assume that the market price of the stock on the grant date was $45 per share their would be NO change for PART A except in a situation where the fair value of options changes.
Part B
1/1/2014
Dr Unearned Compensation $31,500
($45 * $700)
Cr Common Stock $700
($1 *$700)
Cr Paid-in Capital in Excess of Par $30,800
($31,500-$700)
12/31/2014
Dr Compensation Expense $6,300
($31,500 ÷ 5)
Cr Unearned Compensation $6,300
d. Based on the information given the provisions that must be in place for the plan in order to avoid recording compensation expense will be option 1,2&3
1.Substantially all the employees may participate
2. Discount from the market is small (less than 5%)
3. The plan tend to offers no substantive option feature.
