On January 1, 2018, Adams-Meneke Corporation granted 24 million incentive stock
ID: 2552590 • Letter: O
Question
On January 1, 2018, Adams-Meneke Corporation granted 24 million incentive stock options to division managers, each permitting holders to purchase one share of the company’s $1 par common shares within the next six years, but not before December 31, 2020 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $22 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Management’s policy is to estimate forfeitures. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options on January 1, 2018.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2018.
3. Unexpected turnover during 2019 caused an estimate of the forfeiture of 5% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2019 and 2020.
Explanation / Answer
1) Total Compensation cost on January 1, 2018 = No. of Stock options*Fair Value of Option
= 24 million*$5 per option = $120 million vested over 3 years
2) Compensation Expense for 2018 = $120 million/3 yrs = $40 million
Journal Entry (Amounts in $ million)
3) New Total Compensation = Old total compensation*Forefeiture rate
= $120 million*(1-5%)
= $120 million*95% = $114 million
Compensation cost for 2019 = (New total compensation*2/3) - Compensation cost for 2018
= ($114 million*2/3) - $40 million = $76 - $40 = $36 million
Compensation cost for 2020 = (New total compensation*3/3)-Compensation cost for 2018 and 2019
= ($114 million*3/3) - $40 million - $36 million
= $114 million - $40 million - $36 million = $38 million
Journal Entry (Amounts in $ million)
Date Account Titles and Explanations Debit Credit Dec. 31, 2018 Compensation Expense 40 Paid in Capital-Restricted Stock 40 (To record compensation expense for 2018)