Question

On November 1, 2020, Stellar Company adopted a stock-option plan that granted options to key executives to purchase 31,800 shares of the company’s $9 par value common stock. The options were granted on January 2, 2021, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $40, and the fair value option-pricing model determines the total compensation expense to be $477,000. All of the options were exercised during the year 2023: 21,200 on January 3 when the market price was $68, and 10,600 on May 1 when the market price was $77 a share. Prepare journal entries relating to the stock option plan for the years 2021, 2022, and 2023. Assume that the employee performs services equally in 2022 and 202

Answer 1

Answer:

2021 No entry

The total compensation cost is the amount of $477,000

2021

Dr Compensation Expense 238,500

Cr Paid-in Capital- Stock Options 238,500

2022

Dr Compensation Expense 238,500

Cr Paid-in Capital- Stock Options238,500

1/3/2023

Dr Cash 848,000

Dr Paid-in capital - Stock Options 318,000

Cr Common Stock 190,800

Cr Paid-in Capital in Excess of par 975,200

5/1/2023

Dr Cash 424,000

Dr Paid-in Capital - Stock Options 159,000

Cr Common Stock 95,400

Cr Paid-in Capital in Excess of Par 487,600

Explanation:

Preparation of the journal entries relating to the stock option plan for the years 2021, 2022, and 2023.

2021 No entry

The total compensation cost is the amount of $477,000

2021

Dr Compensation Expense 238,500

Cr Paid-in Capital- Stock Options 238,500

(1/2 * $477,000)]

(Being To record compensation expense for 2021)

2022

Dr Compensation Expense 238,500

Cr Paid-in Capital- Stock Options238,500

(1/2 * $477,000)

(Being To record compensation expense for 2022)

1/3/2023

Dr Cash 848,000

(21,200 * $40)

Dr Paid-in capital - Stock Options 318,000

($477,000 *(21,200/31,800))

Cr Common Stock 190,800

(21,200 * $9)

Cr Paid-in Capital in Excess of par 975,200

[848,000+318,000-(190,800)]

(Being To record issuance of 21,200 shares of $9 par value stock upon exercise of option price set at $40)

5/1/2023

Dr Cash 424,000

(10,600 *$40)

Dr Paid-in Capital - Stock Options 159,000

($477,000 * (10,600/31,800))

Cr Common Stock 95,400

(10,600*$9)

Cr Paid-in Capital in Excess of Par 487,600

[424,000+159,000-(95,400)]

(Being To record issuance of 10,600 shares of $9 par value stock upon exercise of option price set at $40)