Congratulations, your firm has just won the new Stock It (the Company) December 31, 2018 audit engagement. As lead senior on the engagement, you help to lead the audit of the clients financial statements. In review, you noted that the client has a significant amount of stock options issued to its employees, a means that many start-up companies use to compensate employees and entice them to put in the effort to make the company successful. Stock It acquired Options R Us on December 28, 2017 and merged Options R Us into its operations. When examining the stock option details, you noted that Options R Us had a stock option plan, the ORU 2013 Plan, and Stock It had a stock option plan, the SI 2016 Plan. You discussed the effect of the business combination on the stock option plans with the Company and sought copies of the plan documents and acquisition agreement. You found that the SI 2016 plan options will replace the ORU 2013 plan options. On December 29, 2017, each employee who had Options R Us options signed a conversion notice acknowledging the option modification outlined in the acquisition agreement. Based on valuations, the Company concluded that five Options R Us options with a $0.10 exercise price were the equivalent value of one Stock It option with a $0.50 exercise price, and thus exchanged the options on a five for one basis. All other Options R Us options terms remained the same; all prior-vested options remained vested. A sole practitioner who may not have had the technical expertise to deal with complex equity transactions performed the December 31, 2017 audit. Since this current balance sheet will appear in the 2018 financial statements, you should perform procedures to gain assurance over the December 31, 2017 balances. You should thus ensure that the stock award modification was properly recorded. Below is a summary of the key factors for the ORU 2013 Plan options that were exchanged for SI 2016 Plan options.

Besides the Companys 2013 Plan, Stock, it added a new 2017 Executive Plan. Effective January 1, 2018, it hired a new CFO who was awarded a total of 200,000 stock options. The key factors related to the new CFOs stock options granted January 1, 2018 are the same as the factors noted above for options that were modified, except that the life of the option is ten years rather than five years. These options were broken down into two different categories of 100,000 options each: 1. 100,000 options to vest ratably over a four-year term starting at the grant date with a portion of the issued options vesting on December 31 of each year. 2. 100,000 options that will vest at the end of four years providing sales grow at 25% per each year over the next four years. Based on an early 2018 initial review, the four-year budget and current sales to date relative to the budget, management believes that this goal is attainable given the Companys budget and forecasts.

Students are required to answer the following questions: 1. What entry should the Company record for the Options R Us stock option modification? 2. How much expense should the Company recognize in 2018 for the modified stock options assuming no option holders forfeited options during 2018? 3. As of December 31, 2018, how many of the new CFOs stock options have vested? 4. How much stock compensation expense should be recorded for the new CFOs stock options during 2018?

Note: You may use the Black-Scholes calculator at www.tradingtoday.com/black-scholes or the instructor provided spreadsheet to calculate the fair value of any stock options as necessary.

ORU Plan Options Number of Options 5,000,000 Exercise Price $0.10 Option Life 5 years Risk Free Rate 2% Fair Value of Stock $0.15 Stock Price Volatility 50% Requisite service period 5 years Pre-combination service period 4 years completed SI Plan Options 1,000,000 $0.50 5 years 2% $1.00 50% Unchanged from 2013 Plan ORU Plan Options Number of Options 5,000,000 Exercise Price $0.10 Option Life 5 years Risk Free Rate 2% Fair Value of Stock $0.15 Stock Price Volatility 50% Requisite service period 5 years Pre-combination service period 4 years completed SI Plan Options 1,000,000 $0.50 5 years 2% $1.00 50% Unchanged from 2013 Plan