On January 1st year 3, 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 vest at the end of year 3 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. No options were exercised in year 3.

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To record the issuance of stock options and the related fair value compensation expense the followin... View the full answer