Question

Assume that Amazon has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock in the future at a price equal to the fair value of the stock at the date of the grant. Amazon has 4,900 stock options outstanding, which were granted at the beginning of 2020. The following data relate to the option grant. Exercise price for options $39 Market price at grant date (January 1, 2020) $39 Fair value of options at grant date (January 1, 2020) $6 Service period 5 years. The following data relate to the option grant.
Exercise price for options $38
Market price at grant date (January 1, 2017) $38
Fair value of options at grant date (January 1, 2017) $6
Service period 5 years

Required:
a. Prepare the journal entries for the first year of the stock-option plan.
b. Prepare the journal entries for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2017.

Answer 1

Answer:

A. 1/1/2020

No entry

12/31/2020

Dr Compensation Expense $5,880

Cr Paid-in Capital—Stock Options $5,880

B. 1/1/2020

Dr Unearned Compensation $26,600

Cr Common Stock $700

Cr Paid-in Capital in Excess of Par $25,900

12/31/2020

Dr Compensation Expense $5,320

Cr Unearned Compensation $5,320

Explanation:

A. Preparation of the journal entries for the first year of the stock-option plan.

1/1/2020

No entry

12/31/2020

Dr Compensation Expense $5,880

($6 X 4,900 ÷ 5)

Cr Paid-in Capital—Stock Options $5,880

B. Preparation of the journal entry (ies) for the first year of the plan assuming that 700 shares of restricted stock were granted at the beginning of 2020.

1/1/2020

Dr Unearned Compensation $26,600

($38 X 700)

Cr Common Stock $700

($1 X 700)

Cr Paid-in Capital in Excess of Par $25,900

($26,600-$700)

12/31/2020

Dr Compensation Expense $5,320

($26,600 ÷ 5)

Cr Unearned Compensation $5,320