On January 1st, Terrys Board of Directors issued the management team 32,500 stock options for Terrys $1 par common stock. Terrys stock price on that day was $4.50/share. The Board set the strike price of the options at $6.60/share to encourage the management team to focus on improving the companys stock price. The average stock price during 2020 was $8.60/share. The options will vest 4 years from issuance and, according to the Black Scholes Model, have a fair value of $6.00 each on the date issued. Terrys management was pleased with the decision because this is the first time that the Board has offered them options as a form of compensation, although they were disappointed that the options could only be used to purchase stock, not redeemed for their fair value.

Later in the year, on April 15 when a market change significantly dropped stock prices, Terrys Board voted to repurchase 20,000 shares of common stock. The stock price on the day of the purchase was $4.00/share. Neither the stock options nor this purchase of treasury stock have been recorded

Terrys management team has also asked you to determine the correct EPS numbers for the year. Up until the issuance of the options, the company had a simple capital structure. Now, though, the company will need to present both basic and diluted EPS on its Income Statement. In addition, they would like to know the effect of the stock options and additional dividend.

1.Make the appropriate journal entries to correctly record the stock options and repurchase.

2. Make the appropriate journal entry to correctly record the tax effect of the stock options. Please note that for tax purposes, equity options are treated as long-term deferred tax assets (for the future tax breaks that they will provide). In making your tax calculations, assume that Terrys management will exercise the options as soon as they can (at the end of the year when they vest)