<em>1. When is Ensor’s stock option measurement date?</em>
<u>Answer:</u> The stock option measurement date is on January 1st, 2021
<u>Explanation:</u>
- 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"
=> <em>The measurement date is January 1, 2021 with the amount of 26 millions stock options were granted. </em>
<em>2. Determine the compensation expense for the stock option plan in 2021. (Ignore taxes.)</em>
<u>Answer:</u> Compensation expense is $52 million
<u>Explanation:</u>
The fair value per stock option is 6$ 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:
<em>Compensation expense year 2021 = Total compensation expense/ Vesting period = 156 million / 3 = $52 million</em>
<em>3. Prepare the journal entries to reflect the effect of forfeiture of the stock options on Ensor’s financial statements for 2022 and 2023.</em>
<u>Answer & Explanation:</u>
2.6 million (10%) of the options were forfeited
=> The remaining percentage represent the unforfeited = 100% - 10% = 90%
- <em>In 2022</em>
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
- <em>In 2023</em>
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
<em>5. Prepare the journal entry to account for the exercise of the options in 2025.</em>
<u>Answer & explanation:</u>
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