Problems 4 (Employee stock options)

On November 1, 2019, London Corp. adopted a stock option plan allowing five of its top executives to purchase 10,000 common shares each at $40 per share. The options were granted on January 2, 2020 and were exercisable three years after the grant date (Jan 2, 2023), assuming the executives were still employees. The options expire five years from the grant date. The total value of the options was estimated to be $ 600,000. On January 2, 2019, the market price of the shares was $ 40.

On January 1, 2021, while the market value of the shares at that date was $ 42, 10,000 options were terminated (forfeited) when one of the executives left the company.

20,000 options were exercised January 3, 2023 when the market price was $ 75, 10,000 on May 1, 2024 when the market price was $ 60, and the remaining 10,000 options expired.

Instructions

1. What is the vesting period of the stock options? What was the initial estimate of annual compensation expense during the vesting period? What was the actual annual compensation expense during the vesting period?
2. Prepare journal entries relating to the stock option plan for the years 2020 through 2024. Assume that the employees perform services equally from 2020 through 2022. Year end is December 31.