Employee Stock Options. Equity-Classified Awards. Journal Entries. Davidson Company compensates its key employees by offering stock options as part of total compensation. On January 1 of the current year Davidson granted 80 000 options to acquire 80.000 shares of its $1 par value common stock at an exercise price of $37 per share. The market price on the date of the grant is also $37 per share so there is no intrinsic value. At grant date the fair value of the options is $4 000,000 or $50 per option. The initial vesting probability is assumed to be 60%. The option plan qualifies as an equity-classified award. There is a 2-year vesting period required before employees can purchase the shares.
Required
- a. Assuming no changes in vesting probability prepare the journal entries required to record compensation expense over the vesting period
- b. Prepare all journal entries required in Year 2 assuming that the vesting probability increases to 80% in Year 2 Assume that the company chooses to adjust the fair value for the estimated forfeitures
- c. Assume that employees exercise 80% of the options expected to vest from part (b) and the other 20% expire. Prepare any journal entries required to record the exercise and expirations
- d. Assume that 20% of the options are forfeited in Year 1 and another 20% are forfeited in Year 2. Assume that the company accounts for forfeitures when they occur. Prepare all journal entries in Year 1 and Year 2, including the
journal entry to record the exercise of the options.
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Chapter 19 Solutions
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