On January 1, 20x0, Magilla Inc. granted stock options to officers and key emplo
ID: 2540881 • Letter: O
Question
On January 1, 20x0, Magilla Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s $10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 20x2, by grantees still in the employ of the company, and expiring December 31, 20x6. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $400,000. On April 1, 20x1, 3,000 options were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this date. On March 31, 20x2, 12,000 options were exercised when the market value of the common stock was $40 per share.
Instructions: Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 20x0, 20x1, and 20x2.
Explanation / Answer
Date
General Journal
Debit
Credit
1 Jan 2010
-No entry required-
31 Dec 2010
Compensation Expense
200000
Paid-in Capital—Stock Options
200000
($400000 x 1/2) (To recognize compensation expense for 2010)
1 April 2011
Paid-in Capital—Stock Options
30000
Compensation Expense
30000
($200000 x 3000/20000) (To record termination of stock options held by resigned employees)
31 Dec 2011
Compensation Expense
180000
Paid-in Capital—Stock Options
180000
($400000 x 1 / 2 x 18 / 20 ) (To recognize compensation expense for 2011)
31 March 2012
Cash(12000 x 25)
300000
Paid-in Capital—Stock Options
240000
($400000 x 12000/20000)
Common Stock
120000
Paid-in Capital in Excess of Par
420000
(To record exercise of stock options)
Date
General Journal
Debit
Credit
1 Jan 2010
-No entry required-
31 Dec 2010
Compensation Expense
200000
Paid-in Capital—Stock Options
200000
($400000 x 1/2) (To recognize compensation expense for 2010)
1 April 2011
Paid-in Capital—Stock Options
30000
Compensation Expense
30000
($200000 x 3000/20000) (To record termination of stock options held by resigned employees)
31 Dec 2011
Compensation Expense
180000
Paid-in Capital—Stock Options
180000
($400000 x 1 / 2 x 18 / 20 ) (To recognize compensation expense for 2011)
31 March 2012
Cash(12000 x 25)
300000
Paid-in Capital—Stock Options
240000
($400000 x 12000/20000)
Common Stock
120000
Paid-in Capital in Excess of Par
420000
(To record exercise of stock options)