On January 1, 2011, Nichols Corporation granted 20,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ common shares at a price of $25 per share. The options were exercisable within a two-year period beginning January 1, 2013, if the grantee was still employed by the company at the time of the exercise. On the grant date, Nichols’ shares were trading at $20 per share, and a fair value options pricing model determined total compensation to be $750,000. Management has assumed that there will be no forfeitures as they do not expect any of their key executives to leave.
On May 1, 2013, 8,000 options were exercised when the market price of Nichols’ shares was $31 per share. The remaining options lapsed in 2014 because executives decided not to exercise their options. Management was indeed correct in their assumption regarding forfeitures in that all executives remained with the company. Assume that the entity follows IFRS.
Instructions
(a) Prepare the necessary journal entries related to the stock option plan for the years ended December 31, 2011, through 2014.
(b) What is the significance of the $20 market price of the Nichols shares at the date of grant? Would the exercise price normally be higher or lower than the market price of the shares on the date of grant?
(c) What is the significance of the $31 market price of the Nichols shares at May 1, 2013, the date of the exercise of the stock options?
(d) What likely happened to the market price of the shares in 2014?
(e) What motive might an employee have for delaying the exercise of the stock option? What are the risks involved?