Problem 4

Princess Beatrice LTD. Started a compensatory stock options plan for all its 500 employees Jan 1, 20x1 when its common shares were trading at $21.50 per share. Each Employee would be allowed to purchase , no earlier than Dec 31, 20x5 , 300 common shares at the price of $21.50 per share. The options were non-transferable , would vest on Dec 31, 20x5, and would expire on Dec 31, 20x6. Using an option pricing model, the company estimated the options had a total value of $240,000 on the date that the options were granted.

At the end of the vesting period on Dec 31, 20x5 , 400 employees excerised their options immediately, when the shares were trading at $29. The remaining employees preferred to wait and continued to hold the options. The share price dropped immediately, however, and never exceeded the option strike price again 20x6. The remaining options expired unexercised on Dec 31, 20x6.

Required

Prepare journal entries to record the granting of the options, annual expense, exercise, and expiration. (princess Beatrices fiscal year ended on December 31)