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, 32 million stock options were granted, exercisable for 32 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 $30. The fair value of the 32 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

Answer:

1. The Ensor's stock measurement date is January 01, 2021

2. Compensation expense for the stock option is $50 million

3. Please see journal entry in the explanation below.

Explanation:

1. It was clearly indicated in the question that on January 1, 2021 , 32 million stock options were granted hence measurement date is ; 1st of January, 2021

2. The fair value per stock option is $6

Therefore, total compensation expenses = $6 × 25 million

= $150 million

Since the options are exerciseable between 01/01/2024 and 01/01/2026

The period for vesting will be 3 years from 01/01/2021 - 31/12/2023

Therefore, the compensation expense for the stock option in year 2021 = Total compensation expense/ Vesting period

= $150 million /3

= $50 million

3. Since 2.6 million(10%) were forfeited, 90% represent the remaining unforfeited. I. e (100%-10%)=90%

In 2022, which is the second year of the vesting period, compensation expense would be;

Compensation expense of 2022 = (Total compensation expense * 90% * the order of the period / Number of period - Compensation expense of

2021

= $150 million *90% *2/3 - $50 million

=$40 million.

In 2023,

Dr Cr

Compensation expense. $40 million

Paid in capital stock options. $40 million