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Chapter 16: Q11E (page 877)

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company鈥檚 \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price 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, 2018, 2019, and 2020.

Short Answer

Expert verified

Journal entries are recorded in Step 2.

Step by step solution

01

Explanations Stock Options

Stock options allows the investors to buy or sell the security, as a right to buy or sell the security at given price and date which are pre-determined in the contract.

02

Journal entries

Date

Transactions

Debit

Credit

Jan 1, 2018

No entry

December 31, 2018

Compensation Expense

$175,000

Paid-in Capital鈥擲tock Options

$175,000

To record compensation expense for 2018 ($350,000 x 陆)

April 1, 2019

Paid-in Capital鈥擲tock Options

17,500

Compensation Expense

17,500

To record Termination of stock option

($175,000 x 2,000 / 20,000 )

Dec31, 2019

Compensation Expense

157,500

Paid-in Capital鈥擲tock Options

157,500

To record compensation expense of 2019

($350,000 x 陆 x 18/20)

Mar 31, 2020

Cash (12,000 x $25)

$300,000

Paid-in Capital鈥擲tock Options (350,000 x 12,000 / 20,000)

$210,000

Common Stock

$120,000

Paid-in Capital in Excess of Par

$390,000

To record exercise of stock option

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Most popular questions from this chapter

On January 1, 2017 (the date of grant), Lutz Corporation issues 2,000 shares of restricted stock to its executives. The fair value of these shares is \(75,000, and their par value is \)10,000. The stock is forfeited if the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any) on January 1, 2017, and on December 31, 2017, assuming the service period is 3 years.

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

GROUPWORK (Entries for Various Dilutive Securities) The stockholders鈥� equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par鈥攃ommon stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholders鈥� equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

(EPS with Convertible Bonds, Various Situations) In 2016, Chirac Enterprises issued, at par, 60 \(1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of \)17,500 and expenses other than interest andtaxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Instructions

a) Compute diluted earnings per share for 2017.

b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017.

c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017.

Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds.
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