Question

(Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each

stock option represents the right to purchase a share of Amazon \(1 par value common stock in the future at a price equal to the

fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning

of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the stock-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted

stock were granted at the beginning of 2017.

(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to

avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid

recording compensation expense?

(1) Substantially all employees may participate.

(2) The discount from market is small (less than 5%).

(3) The plan offers no substantive option feature.

(4) There is no preferred stock outstanding

Short answer

The compensation expense for the first year is $6,000.

Step-by-step solution

Entry for the first year stock-option plan

Date	Particulars	Debit	Credit
January 1, 2017	No Entry
December 31, 2017	Compensation Expense	$6,000
	Paid in Capital- Stock Option		$6,000
	(Being entry for the record compensation expense)

Entry for first-year plan

Date	Particulars	Debit	Credit
January 1, 2017	Unearned Compensation	$28,000
	Common Stock		700
	Paid in Capital more than Par		$27,300
	(Being entry for the shares granted)
December 31, 2017	Compensation Expense	$5,600
	Unearned Compensation		$5,600
	(Being entry for compensation expense)

Journal entry when the price is changed

No change in the part (a) unless the fair value of the option changed

For part (b)

Date	Particulars	Debit	Credit
January 1, 2017	Unearned Compensation	$31,500
	Common Stock		700
	Paid in Capital in Excess of Par		$30,800
	(Being entry for the shares granted)
December 31, 2017	Compensation Expense	$6,300
	Unearned Compensation		$6,300
	(Being entry for compensation expense)

Correct criteria

The first three criteria are the criteria that must be met for an employee stock purchase plan to be non-compensatory. The fourth provision is irrelevant.