Question

Issuance and Exercise of Stock Options) On November 1, 2017, Columbo Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s \(10 par value common stock. The options were granted on January 2, 2018, were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at \)40, and the fair value option-pricing model determines the total compensation expense to be \(450,000.All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was \)67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performsservices equally in 2018 and 2019.

Short answer

Journal entries are recorded in Step 2.

Step-by-step solution

Explanations on Stock Options

Stock options provides a right to the investor related to purchase and sale of security (stock) at pre-determined price and period.

Journal entries

Date	Accounts and Explanations	Debit	Credit
2/1/18	No entry
31/12/18	Compensation Expense	$225,000
	Paid-in Capital—Stock Options		$225,000
	To record compensation expense for 2008 (50% X $450,000)
31/12/19	Compensation Expense	225,000
	Paid-in Capital—Stock Options		225,000
	To record compensation expense for 2009
3/1/20	Cash (20,000 X $40)	800,000
	Paid-in Capital—Stock Options ($450,000 X 20,000/30,000)	300,000
	Common Stock (20,000 X $10)		200,000
	Paid-in Capital in Excess of Par		900,000
	(To record issuance shares)
1/5/20	Cash (10,000 X $40)	$400,000
	Paid-in Capital—Stock Options ($450,000 X 10,000/30,000)	$150,000
	Common Stock		$100,000
	Paid-in Capital in Excess of Par – Common stock		$450,000
	(To record issuance of shares)