Question

On October 15, 2020, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2021, 26 million stock options were granted, exercisable for 26 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2024, and December 31, 2026, at 80% of the quoted market price on January 1, 2021, which was $20. The fair value of the 26 million options, estimated by an appropriate option pricing model, is $6 per option. Ensor chooses the option to recognize forfeitures only when they occur.
Ten percent (2.6 million) of the options were forfeited when an executive resigned in 2022. All other options were exercised on July 12, 2025, when the stock’s price jumped unexpectedly to $25 per share.

Required:
1. When is Ensor’s stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.)
3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023.
5. Prepare the journal entry to account for the exercise of the options in 2025.

Answer 1

1. When is Ensor’s stock option measurement date?

Answer: The stock option measurement date is on January 1st, 2021

Explanation:

- The measurement date of the stock option is the day it is granted with information about:

+) number of share each individual staff receives

+) the price of the option

It was indicated in the question: "On January 1, 2021, 26 million stock options were granted"

=> The measurement date is January 1, 2021 with the amount of 26 millions stock options were granted.

2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.)

Answer: Compensation expense is $52 million

Explanation:

The fair value per stock option is 6$ per option.

=> Total compensation expense for 26 million options would be: 6 x 26 million = $156 million

As the options are exercisable between 01/01/2024 and 31/12/2016

=> The vesting period is 3 years from 01/01/2021 to 31/12/2023

=> The compensation expense for the stock option plan in 2021 is calculated as following:

Compensation expense year 2021 = Total compensation expense/  Vesting period =  156 million / 3 = $52 million

3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023.

Answer & Explanation:

2.6 million (10%) of the options were forfeited

=> The remaining percentage represent the unforfeited = 100% - 10% = 90%

• In 2022

As 2022 is the second year of the vesting period:

The compensation expense of 2022 = (Total compensation expense * 90% * The order of period/ Number of period) - Compensation expense Year 2021

= $156 million × 90% × 2/3 - $52 million = $41.6 million

2022                                                  Debit                                  Credit

Compensation expense               41.6 million

Paid-in-capital-stock options                                                   41.6 million

• In 2023

As 2023 is the third year of the vesting period:

The compensation expense of 2023 = (Total compensation expense * 90% * The order of period/ Number of period) - Compensation expense Year 2021  - Compensation expense of 2022

= $156 million × 90% × 3/3 - $52 million - $41.6 million = $46.8 million

2023                                                  Debit                                  Credit

Compensation expense             46.8 million

Paid-in-capital-stock options                                                   46.8 million

5. Prepare the journal entry to account for the exercise of the options in 2025.

Answer & explanation:

The number of shares exercised = 26 million - 2.6 million = 23.4 million

It is given that the stock options are exercisable between January 1, 2024, and December 31, 2026 at 80% of the quoted market price on January 1, 2021, which was $20.

The exercise price of the stock = $20 × 80% = $16

Cash = Amount paid for shares = Exercise price × Number of options exercise = 16 × 23.4 million = 374.4 million

The paid-in-capital Stock option = 23.4 million x 6 = 140.4 million

Common stock (23.4 million at $1 par per share) = 23.4 million

=> Pain in capital - excess of par =  491.4 million

Journal entry:

General Journal                              Debit                    Credit

Cash                                           374.4 million

Paid-in-capital - Stock option    140.4 million

Common stock                                                           23.4 million

Paid in capital - excess of par                                  491.4 million