On January 1st, Terry’s Board of Directors issued the management team 25,600 stock options for Terry’s $1 par common stock. Terry’s stock price on that day was $3.60/share. The Board set the strike price of the options at $5.20/share to encourage the management team to focus on improving the company’s stock price. The average stock price during Year 3 was $6.80/share. The options will vest 4 years from issuance and, according to the Black Scholes Model, have a fair value of $4.80 each on the date issued. Terry’s management was pleased with the decision because this is the first time that the Board has offered them options as a form of compensation, although they were disappointed that the options could only be used to purchase stock, not redeemed for their fair value. Later in the year, on November 15 when a market change significantly dropped stock prices, Terry’s Board voted to repurchase 8,000 shares of common stock. The stock price on the day of the purchase was $8.00/share. Neither the stock options nor this purchase of treasury stock have been recorded. Terry’s management team has also asked you to determine the correct EPS numbers for the year. Up until the issuance of the options, the company had a simple capital structure. Now, though, the company will need to present both basic and diluted EPS on its Income Statement.

Make the appropriate journal entries to correctly record the stock options and repurchase. 3. Make the appropriate journal entry to correctly record the tax effect of the stock options. Please note that for tax purposes, equity options are treated as long-term deferred tax assets (for the future tax breaks that they will provide). In making your tax calculations, assume that Terry’s management will exercise the options as soon as they can (at the end of the year when they vest).

Answer rating: 100% (QA)

Fair value of an option 4836 12 Noof Shares Issued 25600 Fair va... View the full answer