EXERCISE 16-10 (15-25 minutes)
1/2/05No entry (total compensation cost is $450,000)
12/31/05Compensation Expense225,000
Paid-in Capital—Stock Options225,000
[To record compensation expense
for 2005 (1/2 X $450,000)]
12/31/06Compensation Expense225,000
Paid-in Capital—Stock Options225,000
[To record compensation expense
for 2006 (1/2 X $450,000)]
1/3/07Cash (20,000 X $40)800,000
Paid-in Capital—Stock Options300,000
($450,000 X 20,000/30,000)
Common Stock (20,000 X $10)200,000
Paid-in Capital in Excess of Par900,000
(To record issuance of 20,000
shares of $10 par value stock
upon exercise of options at
option price of $40)
(Note:The market price of the stock has no relevance in the prior entry and the following one.)
5/1/07Cash (10,000 X $40)400,000
Paid-in Capital—Stock Options150,000
($450,000 X 10,000/30,000)
Common Stock100,000
Paid-in Capital in Excess of Par450,000
(To record issuance of 10,000
shares of $10 par value stock
upon exercise of options at
option price of $40)
EXERCISE 16-11 (15-25 minutes)
1/1/05No entry
12/31/05Compensation Expense175,000
Paid-in Capital—Stock Options175,000
($350,000 X 1/2) (To recognize
compensation expense for 2005)
4/1/06Paid-in Capital—Stock Options35,000
Compensation Expense35,000
($350,000 X 2,000/20,000)
(To record termination of stock op-
tions held by resigned employees)
12/31/06Compensation Expense175,000
Paid-in Capital—Stock Options175,000
($350,000 X 1/2) (To recognize
compensation expense for 2006)
3/31/07Cash (12,000 X $25)300,000
Paid-in Capital—Stock Options210,000
($350,000 X 12,000/20,000)
Common Stock120,000
Paid-in Capital in Excess of Par390,000
(To record exercise of stock
options)
EXERCISE 16-26 (20-25 minutes)
(a)Diluted
Shares assumed issued on exercise1,000
Proceeds (1,000 X $6 = $6,000)
Less: Treasury shares purchased ($6,000/$20) 300
Incremental shares 700
10,000 + 700
(b)Diluted
Shares assumed issued on exercise1,000
Proceeds = $6,000
Less: Treasury shares purchased ($6,000/$20) 300
700
X 3/12
Incremental shares 175
10,000 + 175
PROBLEM 16-3
2002. No journal entry would be recorded at the time the stock option plan was adopted. However, a memorandum entry in the journal might be made on November 30, 2002, indicating that a stock option plan had authorized
the future granting to officers of options to buy 70,000 shares of $5 par value common stock at $8 a share.
2003January 2
No entry
December 31
Compensation Expense132,000
Paid-in Capital—Stock Options132,000
(To record compensation expense
attributable to 2003—22,000 options
at $6 ($14 – $8))
2004December 31
Compensation Expense120,000
Paid-in Capital—Stock Options120,000
(To record compensation expense
attributable to 2004—20,000 options
at $6 ($14 – $8))
Paid-in Capital—Stock Options132,000
Paid-in Capital from Expired Stock
Options132,000
(To record lapse of president’s
and vice president’s options to buy
22,000 shares)
(Note to instructor:This entry provides an opportunity to indicate when a credit to compensation expense might result. APB Opinion No. 25, as well as SFAS No. 123, states that if a stock option is not exercised because an employee fails to fulfill an obligation, the estimate of compensation expense recorded in previous periods should be adjusted (as a change in estimate) by decreasing compensation expense in the period of forfeiture and debiting the paid-in capital account.)
PROBLEM 16-3 (Continued)
2005December 31
Cash (20,000 X $8)160,000
Paid-in Capital—Stock Options120,000
(20,000 X $6)
Common Stock (20,000 X $5)100,000
Paid-in Capital in Excess of Par180,000
(To record issuance of 20,000 shares
of $5 par value stock upon exercise
of options at option price of $8 and a
market price of $14 at date of grant)
16-1