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Description of Stock Options

Prepare the necessary entries from 1/1/07-2/1/09 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary."

1) On 1/1/07, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 12,000 shares of common stock at $40 per share. The par value is $10 per share.

2) On 2/1/07, options were granted to each of five executives to purchase 12,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/09. It is assumed that the options were for services performed equally in 2007 and 2008. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000.

3) At 2/1/09, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.

Solution Preview

1. No entry is necessary since it is only the plan which is adopted

2. On 2/1/07, no entry is necessary. The total compensation expense equal to the fair market value of the options is to be recognized equally in 2007 and 2008. The total amount is 1,300,000 ...