Example 3: On November 1, 2016, the stockholders of Chen Company approved a plan that grants the companys five executives options to purchase 2,000 shares each of companys $1 par value common stock. The company grants the options on January 1, 2017. The executive may exercise the options at any time within the next 10 years. The option price per share is $60, and the market price of the stock at the date of grant is $70 per share.

Under the fair value method, the company computes total compensation expense by applying an acceptable fair value option pricing model and Chens total compensation is $220,000. The options vest, or become exercisable, beginning on January 1, 2019.

1. At date of grant (January 1, 2017)

2.To record compensation expense for 2017

3.To record compensation expense for 2018

4. Exercise of Stock Option

Assume that Chens executives exercise 2,000 of 10,000 options on June 1, 2020.

5.Expiration of Stock Option:

Assume that Chens executives fail to exercise the remaining stock options before their expiration date.

Dr. Paid-in CapitalStock Options $176,000

Cr. Paid-in CapitalExpired Stock Options $176,000

No adjustment is made to Compensation Expense upon expiration of options.

6. Forfeiture of options:

This occurs if the employee leaves the company before the vesting date (recorded as a change in estimated compensation expense).

Dr. Paid-in CapitalStock Options XXX

Cr. Compensation Expense XXX