On January 1, Year 1, LL Company issued 100 stock options with an exercise price
ID: 2552201 • Letter: O
Question
On January 1, Year 1, LL Company issued 100 stock options with an exercise price of $18 each to five employees (total 500 options). The options vest on December 31, Year 2, after the employees have completed two years of service. LL expects that all employees vest in the options.
Date Share Price Fair value of option
Jan. 1, Year 1 $21 $12
December 31, Year 1 $21 $13
December 31, year 2 $30 $15
Assume that this is the equity-settled share-based transaction. Please make all necessary journal entries from Jan. 1, Year 1 to December 31, Year2. Assume that this is the choice-of-settlement share-based transaction, in which the employees can choose to settle the options either (1) in shares of stock or (2) in cash. The option fair value of cash-settlement is equal to the fair value of equity-settlement.
Please make all necessary journal entries from Jan. 1, Year 1 to December 31, Year 2 if all employees choose the share settlement.
Explanation / Answer
Answer- If all the employee choose the stock of shares,then jounal entry
Year 1
1 Jan
year 2
31dec
Employee compensation a/c
Working note 1
Total expenses on issue option = Total shares* issue price
500 shares*$18 per share=$9000
Vesting period is 2 year so expenses should be recognized in year1= Total expenses/2
=$9000/2
=$4500
Working note 2
Expenses in the 2nd year would be recognized is $9000-$45000=$4500
B) If Cash settlement opton is avail by shareholder then jpurnal entry
year2
31 dec
Date Particulars Dr amount Cr amountYear 1
1 Jan
No entry 31 dec Employee Compensation a/c $4500 To Employee stock option (W .Note 1) $4500 (Being expenses recoginzed) 31 dec Profit and loss a/c $4500 To employee compensation $4500 ( Being amount transfer to p&l A/cyear 2
31dec
Employee compensation a/c
$4500 To Employee stock option A/c(W.note 2) $4500 (Being Expenses recognized) Profit and loss A/c $4500 To employee compensation $4500 (being expenses transfer to profit and losss) Bank a/c (500 shares8*$3 per share) 1500 Employee stock option a/c 9000 To equity sharecapital 5000 To share premium 5500