On January 1, 2007, 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, 2009, 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, 2009, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2011 because executives decided not to exercise their options.
Instructions
Prepare the necessary journal entries related to the stock option plan for the years 2007 through 2011. Nichols uses the fair value approach to account for stock options.