On November 1, 2015, London Corp. adopted a stock option plan allowing certain of their executives to purchase a total of 30,000 common shares. The options were granted on January 2, 2016, and were exercisable four years after the grant date (Jan 2, 2020), as long as the executives were still employees. The options expire eight years from the grant date. The exercise price was set at $46 and, using an option pricing model to value the options, the total compensation expense was estimated to be $510,000. At January 2, 2016, the market price of the shares was $50.

On January 1, 2017, 3,000 options were terminated (forfeited) when an employee left the company. The market value of the shares at that date was $32. All the remaining options were exercised during 2017: 17,000 on January 3 when the market price was $62, and 10,000 on May 1 when the market price was $77.

Instructions

a)Explain briefly the intrinsic value and the time value of the stock option.

b)Prepare journal entries relating to the stock option plan for the years 2016 through 2019. Assume that the employees perform services equally from 2016 through 2019. Year end is December 31.

c)Discuss the advantages and disadvantages of offering stock options to employees as a means of compensation.