Stock Option

- On 1/1/2020, the stockholders of Firm ABC approve a plan that grants the company’s CEO options to purchase 5,000 shares each of the company’s zero par value common stock.

- The company grants the options on January 1, 2020. The executives may exercise the options after 1/1/2022. The exercise price per share is $10, and the market price of the stock at the date of grant is $10 per share.

- The company computes total compensation expense by applying an acceptable fair value option-pricing model (such as the Black-Scholes option-pricing model). To keep this illustration simple, we assume that the fair value option-pricing model determines the executive’s total compensation expense to be $10,000.

- Corporate tax rate is 20%. Income Tax Expense for 2020 and 2021 is $50,000, and Income Taxes Payable for 2020 and 2021 is $51,000.

Questions:

Prepare journal entries on 12/31/2020 and 12/31/2021. 

Suppose that the CEO exercises options on 1/1/2022 to purchase 5,000 shares and the market price of the stock is $20 per share. Prepare the journal entries.

What is the realized value loss to the current shareholders? 

Prepare the journal entries related to tax return