Fixed Compensatory Share Option Plan Nadal Company has 20 executives to whom it grants compensatory share options on January 1, 2019. At that time, it grants each executive the right to purchase 100 shares of its $5 par common stock at $40 per share after a 3-year service period. The value of each option is estimated to be $10.25 on the grant date. Based on its average employee turnover rate each year, Nadal expects that 2 executives will not vest in the plan. At the end of 2021, Nadal confirms that the actual turnover was the same as expected. On January 5, 2022, 3 executives exercise their options.

Required:

Prepare Nadal’s memorandum entry on the grant date and journal entries for 2019 through 2022 in regard to its compensatory share option plan (round all calculations to the nearest whole number).

Prepare the memorandum entry and journal entries for 2019 to 2022 in regards to its compensatory share option plan.

Share Option Plans: This is an option given to an employee to buy a certain number of shares of stock of the company at a pre-determined price during certain period of time.

Prepare memorandum entry to disclose the terms of share option plan on the grant date, January 1, 2019.

Memorandum entry: On January 1, 2019, the company granted compensatory share options to 20 executives. The plan allows each executive to exercise 100 options to acquire the same number of shares of company’s common stock at an exercise price of $40 per share and vest at the end of service period of 3 years. The estimated fair value of the options expected to be exercised is $18,450.

Working Note 1: Compute the total compensation cost of options.

Total compensation cost of options} = {Fair market value per share × Number of options expected to vest}= $10.25 × 100 shares×18 executives= $18,450

Journalize compensation expense for share options for the year 2019 in the books of Company N:

Table (1)

• Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $6,150.
• Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $6,150.

Working Note 2: Compute the expense allocated to each year of the vesting period.

Expense allocated each year = Total compensation cost of optionsVesting period=$18,4503 years= $6,150

Journalize compensation expense for share options for the year 2020 in the books of Company N:

Table (2)

• Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $6,150.
• Paid-in Capital from Share Options is a shareholders’ equity account. Since share options are granted, company’s stock amount has increased. Therefore, credit Paid-in Capital from Share Options account with $6,150.

Journalize compensation expense for share options for the year 2021 in the books of Company N:

Table (3)

• Compensation Expense is an expense account. Expenses and losses decrease Equity account. Therefore, debit Compensation Expense account with $6,150.
• Paid-in Capital from Share Options is a shareholders’ equity account