Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2018, that permit executives to purchase 12 million 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, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that the options are exercised on April 3, 2021, when the market price is $19 per share.

Total Compensation is $60 million

On December 31, 2018, 2019 and 2020

Dr. Compensation Expense               $20 million

Cr. Paid-in Capital – stock options    $20  million

April 3, 2021

Dr. Paid-in Capital – stock options    $20  million

Cr. Common Stock (12 million x $1)   $12 million

Cr. Paid-in Capital – stock options    $8  million

Explanation:

Stock option is a type compensation which is given to the employees and executives of the company. It requires some some obligation to be performed by the employee to exercise.

Fair value at grant date = $5

Number of option granted = 12 million

Total Compensation = Fair value at grant date x Number of option granted = $5 x 12 million = $60 million

This compensation will be expensed over vesting period of 3 years.

Expense each year = $60 million / 3 = $20 million per year.

No Entry is required on grant date. Fair market value of the option is calculated on this date.

On December 31, 2018, 2019 and 2020 The expense will be recorded.

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