Question

Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2018, that permit executives to purchase 12 million of the company’s $1 par common shares within the next six 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, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that the options are exercised on April 3, 2021, when the market price is $19 per share.
Compute the amount of compensation for 2019 and 2020.

Answer 1

Answer:

2019 -$8,000,000

2020-$8,000,000

Explanation:

Total compensation for three years=number of stock options*fair value

number of stock options is 12 million

fair value of option is $2

total compensation for three years=12,000,000*$2=$24,000,000

Compensation per year=$24,000,000/3=$8,000,000

The $8 million would be recognized in each of the three years  i.e years 2018,2019 and 2020

In each of the three years,compensation expense would be debited with $8 million while paid in capital stock options is credited with $8 millon.

At the  end of the third year ,paid in capital stock options would have increased to $24 million