Example $2$: Stock Option Plans

a$)$ Under its executive stock option plan, National Corporation granted options on January $1,$

Year $1,$ that permit executives to purchase $12$ million of the company's $$1$ par common shares

within the next six years, but not before December $31,$ Year $3($the vesting date$).$ The exercise

price is the market price of the shares on the date of grant, $$17$ per share. The fair value of the

options, estimated by an appropriate option$-$pricing model, is $$5$ per option. No forfeitures are

anticipated. Calculate total compensation expense pertaining to the stock options and record

necessary journal entries.

Calculate total compensation expense:$]$

fair value per option on the grant date

options granted

total compensation

The total compensation is allocated to expense over the $3-$yearservice $($vesting$)$ period Year $1-$

Year $3$:

January $1,$ Year $1-$ grant date:

December $31,$ Year $1,$ Year $2,$ Year $3-$ vesting period $($$ in millions$)$:

Exercise: Suppose that the $9$ million options are exercised on April $3,$ Year $4$ when the market

price is $$19$ per share. What journal entry will National record?

April $3,$ Year $4-$ exercise $($$ in millions$)$:

Expiration: If National's executives fail to exercise the remaining $3$ million stock options

before their expiration date; the company records the following at the date of expiration.

January $1,$ Year $7-$ expiration $($$ in millions$)$: