On November 1, 2022, Aymar Corp. adopted a stock option plan that granted options to key executives to purchase 45,000 common shares. The options were granted on January 2, 2023, and were exercisable two years after the date of grant if the grantee was still a company employee; the options expire six years from the date of grant. The option price was set at $42, and total compensation expense was estimated to be $550,000. Note that the calculation did not take forfeitures into account.

On April 1, 2024, 3,500 options were terminated when some employees resigned from the company. The fair value of the shares at that date was $28. All of the remaining options were exercised during the year 2025: 31,500 on January 3 when the fair value was $52, and 10,000 on May 1 when the fair value was $58 a share. Assume that the entity follows ASPE and has chosen not to reflect forfeitures in its upfront estimate of compensation expense.

Instructions

a. Prepare journal entries relating to the stock option plan for the years 2023, 2024, and 2025. Assume that the employees perform services equally in 2023 and 2024, and that the year end is December 31. Round amounts to the nearest dollar.

b. What is the significance of the fact that the pricing model did not take forfeitures into account? Would taking expected forfeitures into account make the estimate of the total compensation expense higher or lower?

c. What are the main differences between an employee stock option plan and a compensatory stock option plan?