Question

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

Short answer

Journal entries are recorded in Step 2.

Step-by-step solution

Explanations Stock Options

Stock options allows the investors to buy or sell the security, as a right to buy or sell the security at given price and date which are pre-determined in the contract.

Journal entries

Date	Transactions	Debit	Credit
Jan 1, 2018	No entry
December 31, 2018	Compensation Expense	$175,000
	Paid-in Capital—Stock Options		$175,000
	To record compensation expense for 2018 ($350,000 x ½)
April 1, 2019	Paid-in Capital—Stock Options	17,500
	Compensation Expense		17,500
	To record Termination of stock option ($175,000 x 2,000 / 20,000 )
Dec31, 2019	Compensation Expense	157,500
	Paid-in Capital—Stock Options		157,500
	To record compensation expense of 2019 ($350,000 x ½ x 18/20)
Mar 31, 2020	Cash (12,000 x $25)	$300,000
	Paid-in Capital—Stock Options (350,000 x 12,000 / 20,000)	$210,000
	Common Stock		$120,000
	Paid-in Capital in Excess of Par		$390,000
	To record exercise of stock option