Question & Answer: Exercise 138 Prepare the necessary entries from 1/1/17-2/1/19 for the following events using…..

Exercise 138 Prepare the necessary entries from 1/1/17-2/1/19 for the following events using the fair value method. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

1. On 1/1/17, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 17,000 shares of common stock at $45 per share. The par value is $10 per share.

2. On 2/1/17, options were granted to each of five executives to purchase 17,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/19. It is assumed that the options were for services performed equally in 2017 and 2018. The Black-Scholes option pricing model determines total compensation expense to be $1,810,000.

3. At 2/1/19, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.

Expert Answer

 

journal entries
date Explanation debit credit
1- 1/1/2017 No entry required
2- 2/1/2017 No entry required
3- 31/12/17 compensation expense 905000
paid in capital- stock option 905000
4- 31/12/18 compensation expense 905000
paid in capital- stock option 905000
5- 2/1/2019 cash 3060000 = 4*17000*45
paid in capital- stock option 1448000 = (1810000*4)/5
common stock 765000 = 17000*45
paid in capital in excess of par 3743000
6- 2/1/2019 paid in capital stock option 362000
paid in capital- expired stock option 362000
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