INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 19, Problem 19.7E

(1)

To determine

Stock options: Stock options are the stock-based compensation plans provided in the form of an option to buy certain number of shares for a certain price during certain period.

To determine: The compensation cost of stock options

(1)

Expert Solution
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Explanation of Solution

Compute the total compensation cost of stock options.

Total compensation cost of stock options} = {Estimated fair market value of the option × Number of options granted}= $1 × 40,000,000 shares= $40,000,000 (1)

(2)

To determine

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The entry for compensation expense on December 31, 2016, in the books of Corporation WAV

(2)

Expert Solution
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Explanation of Solution

Prepare journal entry for compensation expense on December 31, 2016.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2016        
December 31 Compensation Expense   20,000,000
           Paid-In Capital–Stock Options   20,000,000
(To record compensation expense)

Table (1)

  • Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
  • Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.

Working Notes:

Compute the compensation cost allocated each year.

Expense allocated each year = Total compensation cost of stock optionsVesting period=$40,000,0002 years= $20,000,000 (2)

Note: Refer to Equation (1) for the value and computation of compensation cost.

(3)

To determine

To journalize: The entry for compensation expense on December 31, 2017, in the books of Corporation WAV

(3)

Expert Solution
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Explanation of Solution

Prepare journal entry for compensation expense on December 31, 2017.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2017        
December 31 Compensation Expense   20,000,000
           Paid-In Capital–Stock Options   20,000,000
(To record compensation expense)

Table (2)

  • Compensation Expense is an expense account. Since expenses decrease stockholders’ equity, and a decrease in stockholders’ equity is debited.
  • Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are considered as earned by the employee, stockholders’ equity increased, and an increase in equity is credited.

Note: Refer to Equation (2) for the value and computation of compensation expense.

(4)

To determine

To journalize: The options exercised in the books of Corporation WAV

(4)

Expert Solution
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Explanation of Solution

Journalize the entry for options exercised in the books of Corporation WAV.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2018        
March 12 Cash   240,000,000
    Paid-in Capital – Stock Options   30,000,000
    Common Stock 30,000,000
    Paid-in Capital–Excess of Par 240,000,000
(To record purchase option exercised by stock option holders)

Table (3)

  • Cash is an asset account. Since cash is received, asset value increased, and an increase in asset is debited.
  • Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are exercised and shares are issued, stock options value is decreased, and a decrease in equity is debited.
  • Common Stock is a stockholders’ equity account. Since stock options are exercised and shares are issued, common stock value increased, and an increase in equity is credited.
  • Paid-in Capital–Excess of Par is a stockholders’ equity account. Since stock options are exercised and shares are issued, excess of par value increased, and an increase in equity is credited.

Working Notes:

Compute cash received by Corporation WAV.

Cash received = {Number of shares granted × Exercise percentage × Exercise price}= 40,000,000 shares × 75% × $8= $240,000,000 (3)

Compute the paid-in capital of stock options amount.

Paid-in capital amount} = {Estimated fair market value of the option × Number of options granted×Exercise percentage}= $1 × 40,000,000 shares × 75%= $30,000,000 (4)

Compute the common stock amount.

Common stock amount} = {Par value per share × Number of shares ×Exercise percentage}= $1 × 40,000,000 shares×75%= $30,000,000 (5)

Compute the paid-in capital–excess of par amount.

Paid-in capital–excess of par value} = {Cash received + Paid-in capital of stock options value – Common stock value}= $240,000,000 + $30,000,000 – $30,000,000= $240,000,000

Note: Refer to Equations (3), (4), and (5) for all the values.

(5)

To determine

To journalize: The expired options before being exercised in the books of Corporation WAV

(5)

Expert Solution
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Explanation of Solution

Journalize the entry for expired options in the books of Corporation WAV.

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
2022        
December 31 Paid-in Capital–Stock Options   10,000,000

    Paid-in Capital–Expiration of

    Stock Options

10,000,000
(To record expiry of option unexercised)

Table (4)

  • Paid-in Capital–Stock Options is a stockholders’ equity account. Since stock options are exercised and shares are issued, stock options value is decreased, and a decrease in equity is debited.
  • Paid-in Capital–Expiration of Stock Options is a stockholders’ equity account. Since stock options are expired before being exercised, this account is credited to close the unexercised stock options.

Working Notes:

Compute the paid-in capital–expiration of stock options amount.

Paid-in capital–expiration of stock options value} = {Total compensation granted as shares – Paid-in capital of exercised stock options value}= $40,000,000  – $30,000,000= $10,000,000

Note: Refer to Equation (4) for value and computation of paid-in capital of exercised options.

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Chapter 19 Solutions

INTERMEDIATE ACCOUNTING

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