On January 1, 2013, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2015, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000.

On May 1, 2015, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2017 because executives decided not to exercise their options.

Instructions

Prepare the necessary journal entries related to the stock option plan for the years 2013 through 2017.

Solution:

Dec 31 2013

Compensation Expenses                                    $200,000

Paid in Capital- Stock Options                            $200,000

*To record compensation expense for 2013

Computation-Compensation Expense= 400,000/2= $200,000

Dec 31 2014

Compensation Expenses                                       $200,000

Paid in Capital- Stock Options                               $200,000

*To record compensation expense for 2013

Computation- Compensation Expense= 400,000/2= $200,000

Dec 31 2015

Cash                                                       $240,000

Paid in Capital- Stock Options              $320,000

Common Stock                                        $40,000

Paid in capital – in excess of par common stocks        $520,000

*To record stock option for 5 years and market price $30 with a balance record in the PIC in excess of common stock, 8,000 option exercised out of 10,000

Computation-

PIC- stock options- 400,000 X 80%= $320,000

      Common stock = 8,000 X 5 per share= $40,000

       80%= amount of stock options redeemed.

       8,000/10,000= 80%

Dec 31, 2017

PIC- stock options                                            $80,000

PIC- Expired Stock Options                             $80,000

*To record paid in capital- stock option for 2017 which is $80,000

Computation= 400,000 X 20%= $80,000

20% = amount of stocks that were not redeemed.

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