Ensor Materials Corporation: Share-based compensation
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On October 15, 2015, the board of directors of Ensor Materials Corporation approved a stock option plan for key executives. On January 1, 2016, 20 million stock options were granted, exercisable for 20 million shares of Ensor's $1 par common stock. The options are exercisable between January 1, 2019, and December 31, 2021, at 80% of the quoted market price on January 1, 2016, which was $15. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $6 per option.
Two million options were forfeited when an executive resigned in 2017. All other options were exercised on July 12, 2020, when the stock's price jumped unexpectedly to $19 per share.
1. When is Ensor's stock option measurement date?
2. Determine the compensation expense for the stock option plan in 2016. (Ignore taxes.)
3. What is the effect of forfeiture of the stock options on Ensor's financial statements for 2017 and 2018?
4. Is this effect consistent with the general approach for accounting for changes in estimates? Explain.
5. How should Ensor account for the exercise of the options in 2020?
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Solution Summary
The Solution uses the Ensor example to find the compensation expense for the stock option plan, the effect of forfeiture, and how to account for the exercise of options in the future.
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Part 1
January 1, 2016 [the date the options were granted]
Exercise price is 80% of $15 = $12 per share
Part 2
Total compensation expense: $6 per option * 20 million options = $120 million
There is a three year vesting period
Compensation expense for 2016: $120 million/3 = $40 ...
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