Correct or provide the journal entries and provide a reason behind them: 1. The CEO was not
Question:
Correct or provide the journal entries and provide a reason behind them:
1. The CEO was not the only employee to receive stock options with an $8 exercise price. The company granted the executive VP 320,000 stock options on January 1 when he joined the company. Each one of these options allowed the VP to buy one common share for $8 at any time prior to December 31, 20X8. The fair value of these one-year options was the same as those issued to the CEO. The VP bargained aggressively for his three-year compensation package and because of this, the company allowed the options to vest on February 1, 20X8. He exercised 210,000 of his options on July 1, 20X8 but the following day he left the company. Consequently, he forfeited his outstanding options. The accountant recorded the only entry relating to these options on July 1:
Dr. Cash 1,200,000
Cr. Common shares 1,200,000
You have noticed from the above, that the market price of a common share on January 1, 20X8 was $12 while on December 31, 20X8 it was $15. The average price for a common share during 20X8 was $14. The preferred shares do not trade on any exchange and there is no evidence to suggest that the price has changed since the last preferred share transaction.
2. In addition to selling the preferred shares to the CEO, on January 1, 20X8, the company also granted her 800,000 stock options. Each option gives the holder the right to buy one common share at $8 each. The options are compensation arising from the signing of a two-year employment contract at the beginning of the year. Half of the options vest on December 31, 20X8 while the other half vest one year later. The accountant recorded no entries for these options because the CEO has not exercised any of them. You have performed some preliminary calculations of the fair value of these stock options using the Black Scholes model and have determined that on January 1, 20X8 the fair value of the 1-year options was $4 while the fair value for the 2-year options was $7 each. By December 31, 20X8 these values were $8 and $9 respectively.