Stock Option

On 1/1/2020, the stockholders of Firm ABC approve a plan that grants the companys CEO options to purchase 5,000 shares each of the companys 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 executives 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.

Prepare journal entries on 12/31/2020 and 12/31/2021. (15 pt)

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 (15 pt):

What is the realized value loss (pre-tax) to the current shareholders? (15 pt)

Prepare the journal entries related to tax return (10 pt):