Question
Argon Company compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year, Argon granted 88,000
Argon
Company compensates its key employees by offering stock options as part of total compensation. On
January
1 of the current year,
Argon
granted
88,000
options to acquire
88,000
shares of its
$3.00
par value common stock at an exercise price of
$40
per share. The market price on the date of the grant is also
$40
per share, so there is no intrinsic value. At grant date, the fair value of the options is
$5,280,000,
or
$60
per option. The initial vesting probability is assumed to be
40%.
The option plan qualifies as an equity-classified award. There is a 2-year vesting period required before employees can purchase the shares.Read the requirements
LOADING...
.Requirement
a.
Assuming no changes in vesting probability, prepare the journal entries required to record compensation expense over the vesting period. (Record debits first, then credits. Exclude explanations from any journal entries.)
First, prepare the entry to record compensation expense for Year 1.
Account | December 31, Year 1 | |
| | |
| | |
| | |
| | |
Now, prepare the entry to record the compensation expense for Year 2.
Account | December 31, Year 2 | |
| | |
| | |
| | |
| | |
Requirement
b.
Prepare all journal entries required in Year 2 assuming that the vesting probability increases to
80%.
Assume that the company chooses to adjust the fair value for the estimated forfeitures. (Record debits first, then credits. Exclude explanations from any journal entries.)
Prepare the entry to record the compensation expense for Year 2.
Account | December 31, Year 2 | |
| | |
| | |
| | |
| | |
Requirement
c.
Assume that employees exercise
60%
of the options expected to vest from part (b) and the other
40%
expire. Prepare any journal entries required to record the exercise and expirations. (Record debits first, then credits. Exclude explanations from any journal entries.)Prepare the journal entry to record the exercise assuming that employees exercise
60%
of the options.
Account | Exercise date | |
| | |
| | |
| | |
| | |
| | |
Now, prepare the entry to record for the expirations assuming that
40%
of the options expired.
Account | Expiration date | |
| | |
| | |
| | |
| | |
Requirement d. Assume that
30%
of the options are forfeited in Year 1 and another
30%
are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur. Prepare all journal entries in Year 1 and Year 2, including the journal entry to record the exercise of the options.
First, prepare the entry to record the compensation expense for Year 1.
Account | December 31, Year 1 | |
| | |
| | |
| | |
| | |
Now prepare the entry to record the compensation expense for Year 2.
Account | December 31, Year 2 | |
| | |
| | |
| | |
| | |
Finally, prepare the entry to record the exercise of the options.
Account | December 31, Year 2 | |
| | |
| | |
| | |
| | |
Step by Step Solution
3.43 Rating (153 Votes )
There are 3 Steps involved in it
Step: 1
Total Option Value 880003 264000 Compensation Expense for 1 year ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started